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Udesh RegularGroup-2 (CA Intermediate)

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Cost and Management Accounting
Material Cost
Meaning of Material • The general meaning of material is all commodities/physical objects
supplied to an organization to be used in producing or manufacturing of
finished or intermediate goods.
• It may be classified as direct material or indirect material.

Control of Material • It starts from 3Es i.e. Economy, Efficiency and Effectiveness
• In other words, it is economy in procurement, efficiency in handling and
processing the material and effectiveness in producing desired output as
per the standard.

Importance of • Quality of final product as it depends on quality of inputs.

Material Control • Price of final product as material constitute significant part of any
product
• Production continuity depends on availability of material
• To minimize cost of stock holding and stock out
• To minimize wastage and other losses

Objective of material • Minimized Cost - Material should be purchased only when it is needed
control and in most economic quantities.
• Availability - Material of desired quality should be available when
needed to minimize interruption in production process.
• Lowest Purchase Price - Purchasing of material will be made at the
most favorable prices under the best possible terms.
• Minimum Investment - Investment in material is maintained at
minimum level consistent with the operating requirement.
• Material Storage - Materials are, at all the time, charged as the
responsibility of some individual.
• Reduction in Wastage - Wastage and losses while the materials are in
store should be avoided as far as possible.

Elements of Material • It involves efficient functioning of the following operations:

Control (a) Purchasing of material
(b) Receiving of material
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(c) Inspection of material

(d) Storage of material
(e) Issuing material
(f) Maintenance of inventory records
(g) Stock audit

Steps involved in • Depending upon the size and nature of the operations the purchase
Purchase Procedure procedure may differ from organization to organization. However, the
main steps involved in purchasing procedure are as follows:
Step – 1→ Receipt of purchase requisition
Step – 2→ Issue of enquiry letters and tenders
Step – 3→ Finalization of quotations and placing of purchase
orders on suppliers
Step – 4→ Preparation, placement and follow up of purchase
order
Step – 5→ Receipt of material
Step – 6→ Inspection of materials
Step – 7→ Return of rejected materials
Step – 8→ Checking and passing of purchase invoices for
payments
Step – 9→ Making payment to supplier

Bill of Material or • It is a complete schedule of component parts and raw materials required
Material Specification for a particular job or work order prepared by the drawing
List office/production planning/engineering department along with the
necessary blue prints of drawings.
• On this basis only, purchase requisitions are prepared by the production
or maintenance department and sent to the purchase department for
procurement of materials.
• Uses of Bill of material by different departments:
(a) Marketing or Purchase department – Materials are purchased
based on the specification mentioned in bill of material
(b) Production department – Production is planned based on the this
and accordingly material requisition list is prepared.
(c) Stores department – It is used as reference document while issuing
materials to different departments
(d) Cost or Accounting department – It is used to estimate cost and
profit and becomes basis for verification or comparison.

Purchase Requisition • It is a document prepared by the department requiring material to the

purchase department to purchase the materials specified therein.
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• It provides for the information in respect of specification of the materials

and quantity to be purchased.
• It also gives the information as to when these materials are required.
• It is prepared by stores keeper for regular material and by the
departmental head for special materials (not stocked as regular items)

Purchase Order • It is a document prepared by the purchase department which authorizes

the supplier to supply the specified quantity of materials of specified
quality at specified price on terms specified therein and commitment
from buyer to accept and pay for the goods ordered.

Goods Receipt Note • All materials and stores received during the day are recorded by
storekeeper on Goods Received Note, which are numbered serially and
are prepared in triplicate.
• One copy of Goods Received Note is kept in store and other three copies
are sent to purchase department, accounting department and order
intending department.

Goods Inspection Note • Inspection department checks the quality of material received to ensure
that the quality of material is as per specifications stated in the purchase
order.
• After checking the quality, it prepares the inspection report to show the
results of the inspection.
• If the goods are rejected, reasons for such rejection are specified in this
report.
• The report is either prepared separately or incorporated in the goods
received note.

Material Requisition • It is a formal request, for the supply of specified materials, stores etc. to
Note the production departments for a specific job or work order.
• It authorizes the issuing department to draw from stores the requisitioned
materials.
• Such notes contain information about the description, code and quantity
of materials needed. It also has job/ work order number for which the
material has been requisitioned.

Material Transfer • The transfer of material from one job to another should be strictly
Note prohibited unless the procedure is adequately recorded on the Material
Transfer Note.
• This should indicate all necessary data for debiting and crediting the
concerned jobs or processes affected.
• No entry is required in Bin Card and Stores Ledger for material transfer.
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Material Returned • It is prepared in case when the material is returned after its entry in the
Note receiving report and account books should be adjusted accordingly.

Duties of Store Keeper • General control over store

• Safe custody of materials
• Maintaining records
• Initiate purchase requisition
• Maintaining adequate level of stock
• Issues of materials
• Stock verification and reconciliation

Store Records • It can be prepared in three forms:

(a) Bin cards
(b) Stock control cards
(c) Stores ledger

Bin Card • Bin refers to an almirah, a rack, box, container or space where materials
are kept.
• A separate bin is maintained for each item of material and is assigned an
identification number.
• A card is tied to or placed outside each bin to record the quantity of
materials received, issued, returned and in hand in the bin.
• This card is called bin card or stock card.
• This card also contains particulars regarding maximum level, minimum
level, reorder level, Bin no, name and code of material, location and
stores ledger folio.

Two Bin System • Under this system each bin is divided into two parts.
• One smaller part, should stock the quantity equal to the minimum stock
or even the re-ordering level, and the other to keep the remaining
quantity.
• Issues are made out of the larger part; but as soon as it becomes
necessary to use quantity out of the smaller part of the bins fresh order is
placed.
• Two bin system is supplemental to the record of respective quantities on
the bin card and the stores ledger card.

Stock Control Cards • It is a quantitative record of inventory maintained by stores department

for every item of material.
• It shows overall inventory position in store.
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Stores Ledger • It records both quantity and cost of materials received, issued and those
in stock.
• It is maintained by the cost/accounts department.

Inventory Control • Its main objective is to maintain a trade-off between stock-out and over-
stocking.
• It can be done on following basis:
(a) By setting quantitative levels
(b) On the basis of relative classification
(c) Using ratio analysis
(d) Physical control

Inventory Control by • It is done by setting various levels of stock which are as follows:
Setting Quantitative (a) Re-order quantity or EOQ
Levels (b) Re-order level
(c) Maximum level
(d) Minimum level
(e) Average level
(f) Danger level
(g) Buffer stock

Economic Order • If purchases of material are made in bulk then inventory carrying cost
Quantity (EOQ) or will be high.
Re-Order Quantity • If order size is small each time, then the ordering cost will be high.
• The size of the order for which both ordering and carrying cost are
minimum is known as economic order quantity
!×#×$
• Economic Order Quantity = ! %

A = Annual demand / annual consumption in units

O = Cost of placing and receiving an order
C = Carrying cost per unit per annum

Ordering Cost • These are the costs which are associated with the purchasing or ordering
of materials. It includes costs like tender invitation, transportation of
goods, inspection costs etc.

Carrying Cost • These are the costs for holding or storing goods in the stores. It includes
costs like storage, rent, insurance, spoilage, deterioration etc.
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Assumptions of EOQ • Annual consumption/usage/requirement of raw material is known in

advance.
• Ordering cost per order is known and constant.
• Cost per unit of the material to be purchased is known and it is constant.
• Carrying cost is computed on average inventory ordered.
• The rate of carrying cost remains constant.
• The consumption/usage of material is expected to be even throughout
the year.

Material handling cost • It refers to the expenses involved in receiving, storing, issuing and
handling materials.
• These costs are included as part of the cost of materials either:
• at the rate of percentage of the cost of material issued or
• on the basis of weight of materials issued

Re-order Level • It is the level at which purchase manager will issue a fresh purchase
order with supplier.
• It is fixed somewhere between maximum and minimum level.
Re-order Level = Maximum Consumption × Maximum Re-order Period
Re-order Level = Minimum Level + (Avg. Consumption × Avg. time)
Re-order Level = Safety Stock + (Average Consumption × Average time)

Minimum Level • It is the lowest quantity of a particular material which must be held in
the store at all times.
• It is the level of goods at which the fresh goods ordered earlier should
reach the factory premises.
• It is fixed to avoid the cost of under-stocking and shortage.
Minimum Level = Re-order level – (Avg. consumption × Avg. Re-order
period)

Maximum Level • It is the level beyond which goods are not allowed to exceed.
• In other words, it is the largest quantity of a particular material which
may be held in the store at any time.
• It is fixed to avoid the costs of over-stocking.
Maximum Level = Re-order Level + Re-order Quantity
– [Min. Consumption × Min. time]

Average Level or • It is the average quantity of goods held in the stores.

Normal Stock Level Average Level = (Maximum Level + Minimum Level) / 2
Average Level = Minimum Level + (Re-order Quantity)/2
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Danger Level • Danger level is the level at which normal issues of the raw material
inventory are stopped and emergency issues are only made on special
requisition approved by the competent authority.
• If it is fixed below the minimum level, then it is meant for taking urgent
corrective action.
• If it is fixed above the minimum level, then it is meant for taking urgent
preventive action.
Danger Level = Avg. Consumption × Re-order period for emergency
purchases

Buffer Stock • This stock is kept for contingency and to be used in case of sudden
order.

Stock-Out • It occurs when an inventory item could not be supplied due to

insufficient stock in the store.
• It leads to both financial and non-financial loss to company.
• If high safety stock is maintained than it will lead to high carrying cost
whereas in case of low or zero safety stock, it will lead to high stock out
cost.
• Thus, it is a trade-off between the carrying cost and stock-out cost.

Just in Time (JIT) • It means the purchase of gods or materials such that delivery
Purchases immediately precedes their use.
• It ensures that socks are as loss as possible or at zero level.
• It is implemented by developing closer relationship with supplier.
• It is also known as demand pull or pull through system of production.

ABC Analysis • It stands for Always Better control Analysis.

• It exercises discriminating control over various items of inventory by
classifying them into different categories on the basis of value, quantity,
frequency of replacement etc.
Category % in total % in total Extent of control
value quantity
A 70% 10% Strict control through stock
levels, EOQ etc.
B 20% 20% Need based selective control
C 10% 70% Little control – Focus on
saving associated costs

Advantages of ABC • Smooth Flow - It ensures that, there should be no danger of interruption
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analysis of production.
• Cost saving - The cost of placing orders, receiving goods and
maintaining stocks is minimized.
• Control by exception – Management time is saved since attention need
to be paid only to some of the items rather than all the items.
• Standardization of work – It makes much of the work systematized on
a routine basis.

FSN Analysis • It is a measure of material control to determine the slow-moving and

non-moving items to avoid the stocking of such items and consequential
loss on its disposal. FSN stands for,
F = Fast Moving items; S = Slow Moving items;
N = Non-Moving items
• Fast moving items are consumed very rapidly and their stocks are to be
replenished very frequently.
• Slow moving items are not frequently required or may be required once
in a quarter or so.
• Non-moving items (Dormant stock) refer to those which are not moving
temporarily but movement is expected soon.
• If non-moving items are not required then these are to be declared as
surplus and its disposal should be done by tender or auction. The loss on
disposal is treated as factory overheads.

VED analysis • It is generally used for spare parts.

• Spare parts are classified as Vital (V), Essential (E) and Desirable (D).
• The vital spares are a must for running the concern smoothly and these
must be stored adequately.
• The E type of spares are also necessary but their stocks may be kept at
low figures.
• The stocking of D type of spares may be avoided at times.
• A wrong classification of any spares will create difficulties for
production department. The classification of spares should be left to the
technical staff because they know the need, urgency and use of these
spares.

HML Inventory • It stands for High cost, Medium cost and Low cost inventory.
• In this classification is done on the basis of cost of an individual item
rather than overall basis.
• High cost inventories are given more priority whereas medium and low
cost items are given lesser priority.
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Input-Output Ratio • It is the ratio of quantity of input of material required to produce actual
output.
• It enables comparison of actual consumption and standard consumption.

Inventory Turnover • It indicates the number of times inventory has moved out of stores.
Ratio • This ratio indicates the efficiency or inefficiency with which inventories
are maintained.
• Its purpose is to ensure the blocking of only required minimum funds in
inventory.
• A high ratio indicates that goods are fast moving and vice-versa.

%&'( &* +,(-./,0 1&2'3+-4 43./25 (6- 7-./&4

Inventory Turnover Ratio =
%&'( &* ,8-.,5- '(&19 6-04 43./25 (6- 7-./&4
= …… times

:,;'/=&2(6'/>--9' /2 , ;-,. (@AB/C!/B!)

Also, Inventory held period = E28-2(&.; F3.2&8-. G,(/&

Periodic Inventory • It is a system in which inventory is computed whenever required on the

System basis of actual physical count/measure/weight.
• Inventory is directly calculated by applying the method of valuation of
inventories like FIFO, LIFO.
• In this system, generally losses can’t be detected at earlier stage.
• This system is simple and less expensive.

Perpetual Inventory • It is a system in which a continuous record of receipt and issue of

System materials is maintained by the stores department.
• In this system the stock control cards, bin cards and stores ledger show
the receipts, issue and balance of each item at any point of time after
each transaction.
• The stocks as per dual records namely bin card and stores ledger are
reconciled on a continuous basis.
• This system facilitates planning and control.

Continuous Stock • It is a system of physical verification of stocks of each item on

Taking continuous basis.
• The actual quantity in the bin card is compared with bin balances.
• Such verification is conducted round the year such that all items of
stocks are verified 3 to 4 times in a year.
• Any discrepancies are investigated and reported for corrective action.
• It serves as a moral check on stores staff and acts as deterrent to
dishonesty.
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Treatment of
discrepancies between Causes of discrepancies Treatment
actual stock and 1. Due to clerical errors (e.g. These discrepancies are rectified by
recorded stock omission to post a receipt/issue, passing a suitable rectifying entry
wrong recording of a in the relevant records.
receipt/issue)
2. Due to normal factors causing The amount of these discrepancies
losses (e.g. shrinkage, is treated as part of cost either by
evaporation, natural inflating the cost per unit or by
deterioration etc.) treating as part of factory
overheads.
3. Due to abnormal factors (e.g. The amount of these discrepancies
pilferages, fire, theft etc.) is charged to costing profit & loss
account.
4. Due to normal factors causing The amount of these discrepancies
surpluses (e.g. appreciation in is treated as reduction in overheads.
the weight)

Specific Price Method • Under this method, purchases made for particular jobs are kept
physically separate in the store rooms and store cards are made out for
the individual purchases.
• When materials are issued for jobs, requisitions are priced at the exact
cost as recorded on the appropriate store cards or at the price purchased.
• This system is time consuming, but it is used effectively, when non-
standardized items of materials have to be purchased to meet a
customer’s specification.

First-in-first out • It assumes that items first received are the first to be issued and that the
method (FIFO) requisitions are priced at the cost at which these items were placed in
stock.
• It is suitable when prices are falling.
• Under this method, closing stock of material will be represented very
closely at current market price.

Last-in-First-out • It assumes that the last items purchased are the first to be used.
Method (LIFO) • The balance on hand is priced at the cost of the earliest purchases.
• It simply means that prices of the last purchase are used for accounting
purposes first regardless of actual material flow.
• It is suitable when prices are rising.
• Under this method, cost of materials represent the current market price.
• As per AS-2 and Ind AS-2, LIFO is not permitted.
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FIFO under • When prices are rising, FIFO method may not reflect current prices in
inflationary conditions the material issues and, therefore, charge to production is unduly low.
This method therefore tends to inflate profits

LIFO under • Under LIFO method, in times of inflation, charge to production is at the
inflationary conditions latest high price paid. This will result in lower profits and also lower tax
liability.

LIFO and FIFO • In LIFO method, production is charged with current market prices and
hence pricing of the production is facilitated.
• In case of FIFO method, production is charged with old price (i.e. low
price under inflationary conditions).
• Therefore, we prefer to use LIFO method so the product cost is near to
market price.

Base Stock Method • Under this method, minimum quantity of stock is always held at a fixed
price as reserve in the stock, to meet the state of emergency if it arise.
• The material other than base stock are valued using other methods like
FIFO, LIFO etc.

Simple average • Under this method, material issues are valued at average price.
method • It is calculated by dividing the total of the prices of the materials in the
stock, from which the material to be priced could be drawn, by the
number of prices used in that total.
• This method works well when there is little variation in the purchase
prices.
• The issue price is determined as follows:
H2/( 7./1-' &* +,(-./,0' /2 '(&19
Issue Price = I3+J-. &* 73.16,'-'

Weighted Average • Under this method, quantity of material purchased during a particular
Price Method period is also taken into account.
• Under this method weighted average price is calculated by dividing the
total cost of material purchased during the accounting period, in which
the material to be priced is used, by the total quantity of material
purchased during that period.
• A new average price is calculated at the end of each period, normally a
month and is applied to all the issues in that month.

Periodic weighted average price

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F&(,0 1&'( &* 73.16,'-' 43./25 (6- ,11&32(/25 7-./&4

=
F&(,0 K3,2(/(; 73.16,'-4 43./25 (6- ,11&32(/25 7-./&4

Replacement Price • Replacement price is the price at which it is possible to purchase an

Method item, identical to that which is being replaced or revalued.
• Material issues are valued at replacement cost of items.
• Main objective is to make the product cost at current market price.

Realizable Price • Realizable price is the price at which the material to be issued can be
Method sold in the market.
• This price may be more or less than the original cost price.
• The stores ledger would show profit or loss in this method too.

Standard Price • A standard price will be set for each material and is applied for all the
issues in a period, normally a year.
• It is fixed after taking into account factors such as current prices,
anticipated market trends, discount available and transport charges etc.
• Standard price should not be set on a long term basis.
• It should be determined for short periods only and revised as and when
necessary.
• All receipts under this method are posted at actual prices and issues at
standard prices for each material.
• The difference between standard and actual is disposed of through price
variance account.

Inflated Price • It is a price which includes a charge designed to cover the cost of
contingencies or related costs.
• Normally, the invoice price includes the cost of freight, insurance and
taxes less discounts. Other Expenses like cost of receiving, inspection,
storing and carrying, handling of materials and losses arising out of
evaporation and breaking-up bulk etc.; are treated as production
overhead.
• Under this method, all these expenses are added to determine the cost of
issues.
• Thus, inflated price will recover the full cost of materials.

Re-use Price Method • When materials are rejected and returned to the stores then such
materials are priced at a rate different from the price paid for them
originally.
• There is no final procedure for valuing use of material.
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Treatment of material Item How to record in Stores Ledger

returned & shortage 1. Materials Such returns should be entered in the issue
in stores ledger returned by stores column and valued at the store ledger price
to vendor which includes freight, receiving and handling
charges etc.
Note: In practice such returns are valued at
invoice price only and the difference between
the store ledger price and invoice price is
charged as overheads.
2. Materials There are two ways of treating such returns:
returned to stores (a) Such returns are entered in the receipt
column at the price at which they were
originally issued, and the materials are kept
in suspense, to be issued at the same price
against the next requisition.
(b) Such returns are entered in the receipt
column as if they were fresh purchases at
the original issue price.
3. Shortages during Shortages of materials found during physical
physical verifications should be entered in the issue
verifications column and valued at the rate as per the method
adopted, i.e. FIFO or any other.

Waste • It represents the portion of basic raw materials lost in processing having
no recoverable value.
• Waste may be visible—remnants of basic raw materials—or invisible,
e.g. disappearance of basic raw materials through evaporation, smoke
etc.
• Loss on normal wastage is usually charged to production by inflating the
unit price of material used in such a way that total cost is recovered out
of the smaller quantity actually used, whereas abnormal waste is
transferred to the Costing Profit and Loss Account.

Scrap • It has been defined as the incidental residue from certain types of
manufacture, usually of small amount and low value, recoverable
without further processing.
• Accounting Treatment:
• Where the value of scrap is negligible, it may be excluded from
costs.
• The sales value of scrap is deducted from overhead to reduce the
overhead rate.
• If scrap is identifiable with a particular job or process and its value
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is significant than credit is given to the job or process concerned.

• Scrap due to abnormal reasons will be transferred to the Costing
P&L Account.

Spoilage • It is the term used for materials which are badly damaged in
manufacturing operations, and they cannot be rectified economically and
hence taken out of process to be disposed off in some manner without
further processing.
• It involves not only the loss of material but also of labour and overheads
incurred upto the stage where the spoilage has occurred.
• Normal spoilage costs are included in costs either by charging the loss
due to spoilage to the production order or charging it to production
overhead.
• Abnormal spoilages are charged to the Costing Profit and Loss Account.

Defective • It represents unit of output which fail to comply with a set quality
Work/Rejects standard and are subsequently rectified, sold as sub-standard or disposal
as scrap.
• Defective work may be due to various factors like poor quality of
materials, incompetent supervision etc.
• Accounting Treatment:
• If defective work has a nominal value, the loss is completely
absorbed by good units.
• Alternatively, the cost of defective work can be charged as general
factory overhead.
• Alternatively, cost of defective work is charged directly to
departments responsible for it.
• The cost of defective work due to abnormal reasons shall be
charged to the Costing P&L Account.

Rectification • It means bringing back the defective units either to standard units of
production or as seconds, by reworking.
• The work of rectification in small concerns is usually entrusted to the
production shop, whereas in big concerns, a separate department carries
out the task.
• The task of rectification is usually carried out under a ‘Rectification
Work Order’.
• Accounting Treatment:
• If it is due to normal consequences than it is charged to the jobs.
• If it is due abnormal reasons then it is charged to Costing P&L
Account.
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Obsolescence • It is the loss in the intrinsic value of an asset due to its supersession or
technological advancements.
• The loss arising out of obsolete materials is an abnormal loss and thus
should be transferred to costing P&L.
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Practical Questions

Question – 1 [SM]
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 : 10,000 kg
Order placing cost per order : `50
Cost per kg of raw materials : `2
Storage costs : 8% on average inventory
[Answer – 2,500 kg]

Question – 2
A wholesaler supplies 30 stuffed dolls each weekday to various shops. Dolls are purchased from the
manufacturer in lots of 120 each of `1200 per lot.

Every order incurs a handling charge of `60 plus a freight charge of `250 per lot. Multiple and fractional lots
also can be ordered and all orders are filled the next day. The incremental cost is `0.60 per year to store a
doll in inventory. The wholesaler finances inventory investments by paying its holding company 2% monthly
for borrowed funds.

How many dolls should be ordered, at a time in order to minimize the total annual inventory cost? Assume
that there are 250 weekdays in a year. How frequently he should order?
[Answer – 7 orders; 1.71 months]

Question – 3
A manufacturer buys certain equipment from outside suppliers at `20 per unit. Total annual needs are 900
units. The further data are available:
Annual return of investment 10%
Rent, Taxes, insurance per unit per year `2
Cost of placing an order `200
Determine the economic order quantity.
[Answer – 300 units]

Question – 4 [SM]
(i) Compute EOQ and total variable cost for the following:
Annual Demand = 5,000 units
Unit price = `20
Order cost = `16
Storage cost = 2% per annum
Interest rate = 12% per annum
Obsolescence rate = 6% per annum
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(ii) Determine the total cost that would result for the items if a new price of `12.80 is used.
[Answer – (i) 200 units; `1,00,800; (ii) `64,640]

Question – 5
SK Ltd. has received an offer of quantity discounts on its order of materials as under:
Tons (No.) Price per tons (`)
Less than 250 6.00
250 and less than 800 5.90
800 and less than 2,000 5.80
2,000 and less than 4,000 5.70
4,000 and above 5.60
The annual requirement for the materials is 4,000 tons. The ordering cost per order is `6 and the carrying
cost is estimated at 20% per annum. You are required to compute the most Economic Order Quantity
presenting the relevant information in a tabular form.
[Answer – Order size of 800 units]

Question – 6 [SM]
A company manufactures a special product which requires a component ‘Alpha’. The following particulars
are collected for the year 2020:
(i) Annual demand of Alpha 8,000 units
(ii) Cost of placing an order `200 per order
(iii) Cost per unit of Alpha `400
(iv) Carrying cost p.a. 20%
The company has been offered a quantity discount of 4% on the purchase of ‘Alpha’ provided the order size
is 4,000 components at a time.
Required:
(i) Compute the economic order quantity
(ii) State whether the quantity discount offer can be accepted.
[Answer – (i) 200 units; (ii) Not to be accepted]

Question – 7 [MTP – July 2020] [RTP – May 2023]

A company manufactures a product from a raw material which is purchased at `60 per kg. The company
incurs a handling cost of `360 plus freight of `390 per order. The incremental carrying cost of inventory of
raw material is `0.50 per kg per month. In addition, the cost of working capital finance on the investment in
inventory of raw material is `9 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:
(a) Calculate the economic order quantity of raw material
(b) Advise, how frequently should orders for procurement be placed. (Assuming 360days in the year)
(c) If the company proposes to rationalize placement of orders on quarterly basis, what percentage of
discount in the price of raw materials should be negotiated?
[Answer – (a) 2,00 kg; (b) 18 days; (c) 2%]
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Question – 8
SK Ltd. which manufactures a product ‘S’ provides you the following information:
Monthly demand of ‘S’ = 900 units
Cost of placing an order = `75
Carrying cost per unit p.m. = 2%
Cost of input to be purchased = `50 per kg
Output per kg of input = 1.5 units
Required:
(a) What percentage of discount in the price of input should be negotiated if the company proposes to
rationalize placements of orders on monthly basis?
(b) Suppose the company followed the policy of economic order quantity and at the end of the year, it
was found that the cost of placing an order was `108 instead of `75 and all other estimates were
correct. What is the difference in cost on account of this error?
[Answer – (a) 0.24%; (b) `72]

Question – 9 [RTP Nov 2019]

SK Limited produces product ‘S’ which has a quarterly demand of 20,000 units. Each product requires 3kg
and 4kg of material K and M respectively. Material K is supplied by a local supplier and can be procured at
factory stores at any time, hence, no need to keep inventory for material K. The material M is not locally
available, it requires to be purchased from other states in a specially designed truck container with a capacity
of 10 tons.
The cost and other information related with the materials are as follows:
Particulars Material-K Material-M
Purchase price per kg (excluding GST) `140 `640
Rate of GST 18% 18%
Freight per trip (fixed, irrespective of quantity) - `28,000
Loss of materials in transit* - 2%
Loss in process* 4% 5%
*On purchased quantity
Other information:
- The company has to pay 15% p.a. to bank for cash credit facility.
- Input credit is available on GST paid on materials.
Required:
(a) Calculate cost per kg of material K and M
(b) Calculate the economic order quantity for both the materials
[Answer – (a) `145.83; `691.23; (b) 0 kg; 13,632.62 kg]

Question – 10 [MTP – Nov 2019]

SK Ltd. manufactures a product S which requires two raw materials P and M in a ratio of 1:4. The sales
 19

department has estimated a demand of 5,00,000 units for the product for the year. To produce one unit of
finished product, 4 units of material P is required.

Stock position at the beginning of the year is as below:

Product SK 12,000 units
Material P 24,000 units
Material M 52,000 units

To place an order the company has to spend `15,000. The company is financing its working capital using a
bank cash credit @ 13% p.a.

Product SK is sold at `1,040 per unit. Material P and M are purchased at `150 and `200 respectively.
Required: Compute economic order quantity (EOQ):
(a) If purchase order for both materials is placed separately
(b) If purchase order for both materials is not placed separately
[Answer – (a) 54,462 units; 94,600 units; (b) 21,592 units; 86,860 units]

Question – 11
SK Ltd. manufacturers of a special product, follows the policy of EOQ (Economic Order Quantity) for one of
its components. The components details are as follows:
Purchase price per component `200
Cost of an order `100
Annual cost of carrying unit in Inventory 10% of purchase price
Total cost of carrying 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.
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 is offered 5% discount on a single order?
(Assume that the inventory carrying cost does not vary according to discount policy)
[Answer – (a) 200 units; (b) Not to accept offer; (c) Accept the offer]

Question – 12 [SM]
Two components, A and B are used as follows:
Normal usage 50 per week each
Maximum usage 75 per week each
Minimum usage 25 per week each
Re-order quantity A:300; B:500
Re-order period A: 4 to 6 weeks
B: 2 to 4 weeks
 20

Calculate for each component (a) Re-ordering level, (b) Minimum level, (c) Maximum level and (d) Average
level
[Answer – (a) 450 units; 300 units; (b) 200 units; 150 units; (c) 650 units; 750 units; (d) 425 units; 450
units]

Question – 13 [SM]
From the details given below, calculate:
(i) Re-ordering level
(ii) Maximum level
(iii) Minimum level
(iv) Danger level
Re-ordering quantity is to be calculated on the basis of following information:
Cost of placing a purchase order is `20.
Number of units to be purchased during the year is 5,000
Purchase price per unit inclusive of transportation cost is `50.
Annual cost of storage per unit is `5.
Details of lead time: Average – 10 days, Maximum- 15 days, Minimum- 5 days
For emergency purchase – 4 days
Rate of consumption: Average- 15 units per day
Maximum- 20 units per day
[Answer – (i) 300 units; (ii) 450 units; (iii) 150 units; (iv) 60 units]

Question – 14
M/s SK Ltd. are the manufacturers of picture tubes for T.V. The following are the details of their operation
during the year:
Average monthly market demand 2,000 tubes
Ordering cost `100 per order
Inventory carrying cost 20% per annum
Cost of tubes `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 the following from the above information:
(a) Economic order quantity. If the supplier is willing to supply quarterly 1,500 units at a discount of 5%,
is it worth accepting?
(b) Maximum level of stock
(c) Minimum level of stock
(d) Reorder level
[Answer – (a) 102 tubes; Accept the offer (b) 1,600 tubes; (c) 900 tubes; (d) 1,402 tubes]
 21

Question – 15
A company buys in lots of 6,250 units which is a 3 month’s supply. The cost per unit is `2.40. Each order
costs `45 and inventory carrying cost is 15% of average inventory value.
Required:
(a) What is the total annual cost of existing inventory policy?
(b) How much money could be saved by employing the economic order quantity?
(c) If the company operates 250 days a year, the procurement time is 10 days and safety stock is 500
units. Find the reorder level, maximum level, minimum level and average inventory level.
[Answer – (a) `61,305; (b) `405; (c) 1,500 units; 3,000 units; 500 units; 1,750 units]

Question – 16 [RTP – May 2019]

Ananya Ltd. produces a product ‘Exe’ using a raw material Dee. To produce one unit of Exe, 2 kg of Dee is
required. As per the sales forecast conducted by the company, it will able to sale 10,000 units of Exe in the
coming year. The following is the information regarding the raw material S:
(i) The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 20 kg. more than the average consumption per day.
(iii) There is an opening stock of 1,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is `125 per kg.
There is an opening stock of 900 units of the finished product Exe.
The rate of interest charged by bank on Cash Credit facility is 13.76%.
To place an order company has to incur `720 on paper and documentation work.
From the above information find out the followings in relation to raw material S:
(a) Re-order Quantity
(b) Maximum Stock level
(c) Minimum Stock level
(d) Calculate the impact on the profitability of the company by not ordering the EOQ.
[Take 364 days for a year]
[Answer – (a) 1,000 kg; (b) 1,440 kg; (c) 260 kg; (d) `440]

Question – 17 [RTP – May 2018]

SK Ltd. supplies surgical gloves to nursing homes and polyclinics in the city. These surgical gloves are sold
in pack of 10 pairs at price of `250 per pack.

For the month of November 2018, it has been anticipated that a demand for 60,000 packs of surgical gloves
will arise. Aditya Brothers purchases these gloves from the manufacturer at `228 per pack within a 4 to 6
days lead time. The ordering and related cost is `240 per order. The storage cost is 10% p.a. of average
inventory investment.
Required:
(a) Calculated the Economic Order Quantity (EOQ)
(b) Calculate the number of orders needed every year
(c) Calculate the total cost of ordering and storage of the surgical gloves.
(d) Determine when should the next order to be placed. (Assuming that the company does maintain a
safety stock and that the present inventory level is 10,033 packs with a year of 360 working days).
 22

[Answer – (a) 3,893 packets; (b) 185 orders; (c) `88,78,020; (d) Immediately]

Question – 18
SK, a small scale manufacturer, produces a product S by using two raw materials K and M in the ratio of 3:2.
Material K is perishable in nature and if not used within 5 days of purchase it becomes obsolete. Material M
is durable in nature and can be used even after one year. The company has estimated a sales volume of 30,000
kg. for the month of October and expects that the trend will continue for the entire year. The ratio of input and
output is 5:3. The purchase price of per kilogram of raw material K and M is `15 and `22 respectively
exclusive of taxes. Material K can be purchased from the local market within I to 2 days period. On the other
hand, Material M is purchased from neighbouring state and it takes 2 to 4 days to receive the material in the
store.
To place an order the company has to incur an administrative cost of `120. Carrying cost for Material K and
M is 15% and 5% respectively.

At present Material K is purchased in a lot of 8,000 kg. to avail 10% discount on market price. SGST &
CGST applicable for material K is 4% (credit available) and IGST on Material M is 2% (credit not available).
Company works for 25 days in a month and production is carried out evenly.

You are required to calculate:

(a) Economic Order Quantity (EOQ) for each material;
(b) Maximum stock level for Material K;
(c) Calculate saving/loss in Material K if purchase quantity equals to EOQ.
[Answer – (a) 6,197 kg; 71,65 kg; (b) 6,000 kg; (c) `9,03,828]

Question – 19
A company has the option to procure a particular material from two sources:
Source I – assures that defectives will not be more than 2% of supplied quantity
Source II does not give any assurance, but on the basis of past experience of supplies received, it is
observed that defective percentage is 2.8%

The material is supplied in lots of 1,000. Source II supplies the lot at a price, which is lower by `100 as
compared to Source I. The defective units of material can be rectified for use at a cost of `5 per unit. You are
required to find out which of the two source is more economical.
[Answer – Source-II]

Question – 20 [July 2021]

MM Ltd. has provided the following information about the items in its inventory.
Item Code Number Units Unit Cost (`)
101 25 50
102 300 01
103 50 80
104 75 08
 23

105 225 02
106 75 12
MM ltd. has adopted the policy of classifying the items constituting 15% or above to Total Inventory Cost as
“A” category, items constituting 6% or less of Total Inventory Cost as “C” category and the remaining items
as “B” category.
You are required to:
(i) Rank the items on the basis of % of Total Inventory Cost.
(ii) Classify the items into A, B and C categories as per ABC analysis of Inventory Control adopted by MM
Ltd.
[Answer – (i) II; VI; I; IV; V; III; (ii) A; C; A; B; C; B]

Question – 21
Compute the materials turnover ratio for materials S and K and comment upon the results.
Material S Material K
Opening stock 25,000 87,500
Purchases during the year 1,90,000 1,25,000
Closing stock 15,000 62,500
[Answer – 10 times; 2 times]

Question – 22
The following data are available in respect of material X for the year ended 31st March, 2021.
Opening stock `90,000
Purchases during the year `2,70,000
Closing stock `1,10,000
Calculate:
(i) Inventory turnover ratio, and
(ii) The number of days for which the average inventory is held.
[Answer – (i) 2.5 times; (ii) 146 days]

Question – 23
Raw material ‘S’ costing `150 per kg and ‘K’ costing `90 per kg are mixed in equal proportions for making
product ‘M’. The loss of material in processing works out to 25% of the product. The production expenses are
allocated at 40% of direct material cost. The end product is priced with a margin of 20% over the total cost.

Material ‘K is not easily available and substitute raw material ‘P’ has been found for ‘K’ costing `75 per kg.
It is required to keep the proportion of this substitute material in the mixture as low as possible and at the
same time maintain the selling price of the end product at existing level and ensure the same quantum of
profit as at present.

You are required to compute the ratio of the mix of the raw material ‘S’ and ‘P’.
[Answer – 3:2]
 24

Question – 24 [SM]
At what price per unit would S entered in the stores ledger, if the following invoice was received from a
supplier?
Invoice `
200 units S @ `5 1,000
Less: 20% discount 200
800
Add: IGST @ 12% 96
896
Add: Packing charges (non-returnable boxes) 50
946
Notes: (a) A 2% discount will be given for payment in 30 days
(b) Documents for claiming input credit are available.
[Answer - `4.25]

Question – 25 [RTP – May 2022]

SK Ltd., not registered under GST, purchased material S from a company which is registered under GST. The
following information is available for the one lot of 1,000 units of material purchased:
List price of one lot `50,000
Trade discount @10% on listed price
CGST and SGST (Credit not available) @12% (CGST 6% & SGST 6%)
Cash discount @10%
(will be given only if payment is made within 30 days)
Freight and Insurance `3,400
Toll tax paid `1,000
Demurrage `1,000
Commission on brokerage on purchases `2,000
Amount deposited for returnable containers `6,000
Amount of refund on returning containers `4,000
Other expenses @2% of total cost
20% of material shortage is due to normal reasons.
The payment to the supplier was made within 20 days of the purchases
You are required to calculate cost per unit of material purchased to SK Ltd.
[Answer - `75]

Question – 26
A manufacturer of Surat purchased three chemicals S, K and M from Delhi. The invoice provides the
following information:
`
Chemical S : 3,000 kg at `4.20 per kg 12,600
Chemical K : 5,000 kg at `3.80 per kg 19,000
Chemical M : 2,000 kg at `4.75 per kg 9,500
 25

CGST & SGST 2,055

Railways freight 1,000
Total cost 44,155
A shortage of 200 kg in chemical S, 280 kg in chemical K and 100 kg in chemical M was noticed due to
normal breakages. The manufacturer paid cartage of `22 for chemical S, `63 for chemical K and `32 for
chemical M. Calculate the stock rate that you suggest for pricing issue of chemicals assuming a provision of
5% towards further deterioration.
[Answer - `5.09; `4.57; `5.65]

Question – 27
SK Ltd. has projected the following for a product S.
Annual Requirement 10,400 units
Economic Order Quantity 1,040 units
Expected usage per week 200 units
Re-order period 2 weeks
The probability distribution of usage of S over a two week period is as follows:
Usage (Units) 150 250 310 400 460 500 560
Probability .05 .05 .10 .50 .10 .15 .05
The stock out cost is `4 per unit and carrying cost of `5.2 per unit per annum. Calculate Safety Stock and
Re-order point.
[Answer – Safety stock 100 units and ROL 500 units]

Question – 28 [SM]
SK Ltd. uses a small casting in one of its finished products. The castings are purchased from a foundry. SK
limited purchases 54,000 castings per year at a cost of `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
`9,000 to place a single purchase order and about `300 to carry one casting in inventory for a year. The high
carrying costs results 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:
(a) Compute the economic order quantity (EOQ)
(b) 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?
(c) 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?
 26

(d) Assume 5% stock-out risk. What would be the total cost of ordering and carrying inventory for one
year?
(e) Refer to the original data. Assume that using process re-engineering the company reduces its cost of
placing a purchase order to only `600. In addition, company estimates that when the waste and
inefficiency caused by inventories are considered, the true costs of carrying a unit in stock is `720
per year.
(i) Compute the new EOQ
(ii) How frequently would the company be placing an order, as compared to the old purchasing
policy?
[Answer – (a) 1,800 units; (b) 150 units; 1,050 units; (c) 450 units; 1,350 units; (d) `6,75,000; (e) (i) 300
units; (ii) 12 days; 2 days]

Question – 29
From the following data, prepare store ledger for the month of April using (a) FIFO; (b) LIFO; (c) Weighted
Average;
1 April Opening balance 50 units @ `2
3 April Receipt No. 6 30 units @ `3
4 April Issues 40 units
5 April Returned to store by production department from issue of 4.4.2012 5 units
6 April Receipt No. 8 20 units @ `4
7 April Receipt No. 9 50 units @ `5
9 April Issues 40 units
13 April Issues 40 units
16 April Returned to vendor from goods purchased on 7.4.2012 5 units
18 April Transferred from Job 182 to 187 19 units
20 April Receipt No. 10 30 units @ `6
25 April Issues 20 units
The stock verifier of the company reported a shortage of 10 units on 15 April and 10 units on 30th April.
th

Question – 30 [RTP May 2020]

SK Appliances manufactures electronic home appliances. It follows weighted average cost method for
inventory valuation. Following are the data of component S:
Date Particulars Units Rate per unit
(`)
15 Dec Purchase Order – 002 10,000 9,930
30 Dec Purchase Order – 003 10,000 9,780
01 Jan Opening stock 3,500 9,810
05 Jan GRN*-002 (against Purchase Order – 002) 10,000 -
05 Jan MRN**-001 (against the Purchase Order – 002) 500 -
06 Jan Material Requisition – 005 3,000 -
 27

07 Jan Purchase Order – 004 10,000 9,750

10 Jan Material Requisition – 006 4,500 -
12 Jan GRN-003 (against the Purchase Order – 003) 10,000 -
12 Jan MRN-002 (against the Purchase Order – 003) 400 -
15 Jan Material Requisition – 007 2,200 -
24 Jan Material Requisition – 008 1,500 -
25 Jan GRN-004 (against the Purchase Order – 004) 10,000 -
28 Jan Material Requisition – 009 4,000 -
31 Jan Material Requisition – 010 3,200 -
*GRN – Goods Received Note; **MRN – Material Returned Note
Based on the above data, you are required to Calculate:
(a) RE-order level
(b) Maximum stock level
(c) Minimum stock level
(d) Prepare store ledger for the period January and determine the value of stock as on 31 Jan.
(e) Value of components used during the month of January.
(f) Inventory turnover ratio.
[Answer – (a) 94,500 units; (b) 85,000 units; (c) 43,500 units; (d) `1,39,001; (e) `1,81,061; (f) 2.09
times]

Question – 31 [May 2023]

A Limited has furnished the following information for the months from 1st January to 30th April, 2023:
January February March April
Number of working days 25 24 26 25
Production (in units) per working day 50 55 60 52
Raw material purchases (% by weights to 21% 26% 30% 23%
total of 4 months)
Purchase price of raw material (per kg) `10 `12 `13 `11
Quantity of raw material per unit of product: 4 kg
Opening stock of raw material on 1st January: 6,020 kg (Cost `63,210)
Closing stock of raw material on 30th April: 5,100 kg
All the purchases of material are made at the start of each month.
Required:
(i) Calculate the consumption of raw materials (in kgs) month by month and in total
(ii) Calculate the month-wise quantity and value of raw materials purchased.
(iii) Prepare the priced stores ledger for each month using the FIFO method.
[Answer – (i) 5,000; 5,280; 6,240; 5,200; 21,720; (ii) `43,680; `64,896; `81,120; `52,624; (iii) `56,732]
 28

Practice Questions

Question – 32 [May 2022]

A Ltd. a toy company purchases its requirement of raw material from S Limited at `120 per kg. The
company incurs a handling cost of `400 plus freight of `350 per order. The incremental carrying cost of
inventory of raw material is `0.25 per kg per month. In addition, the cost of working capital finance on the
investment in inventory of raw material is `15 per kg per annum. The annual production of the toys is 60,000
units and 5 units of toys are obtained from one kg of raw material.

Required:
(i) Calculate the Economic Order Quantity (EOQ) of raw materials.
(ii) Advise, how frequently company should order to minimize its procurement cost. Assume 360
days in a year.
(iii) Calculate the total ordering cost and total inventory carrying cost per annum as per EOQ.
[Answer – (i) 1,000 kg; (ii) 30 days; (iii) `18,000]

Question – 33 [SM]
(a) SK Ltd. has received an offer of quantity discounts on its order of materials as under:
Price per ton (`) Ton (Nos.)
1,200 Less than 500
1,180 500 and less than 1,000
1,160 1,000 and less than 2,000
1,140 2,000 and less than 3,000
1,120 3,000 and above
The annual requirement for the material is 5,000 tons. The ordering cost per order is `1,200 and the stock
holding cost is estimated at 20% of material cost per annum. You are required to compute the most
economical purchase level.

(b) What will be your answer, if there are no discounts offered and the price per ton is `1,500?
[Answer – (a) 1,000 units; (b) 200 units]

Question – 34 [SM]
The complete Gardner is deciding on the economic order quantity for two brands of lawn fertilizer: SK and
PM. The following information is collected:
Fertilizer SK PM
Annual Demand 2,000 Bags 1,280 Bags
Relevant ordering cost per purchase order `1,200 `1,400
Annual relevant carrying cost per bag `480 `560
Required:
(a) Compute EOQ for SK and PM.
 29

(b) For the EOQ, what is the sum of the total annual relevant ordering costs and total annual relevant
carrying costs for SK and PM.
(c) For the EOQ compute the number of deliveries per year for SK and PM.
[Answer – (i) 100 bags; 80 bags; (ii) `48,000; `44,800; (iii) 20 orders; 16 orders]

Question – 35 [May 2018]

M/s X Private Limited is manufacturing a special product which requires a component “SKY BLUE”. The
following particulars are collected for the year ended 31st March, 2018:
Annual demand of “SKY BLUE” 12,000 units
Cost of placing an order `1,800
Cost per unit of “SKY BLUE” `640
Carrying cost per annum 18.75%
The company has been offered a quantity discount of 5% on the purchase of “SKY BLUE”, provided the
order size is 3,000 components at a time.
Required:
(a) Compute the economic order quantity
(b) Advise whether the quantity discount offer can be accepted
[Answer – (a) 600 units; (b) Accept the offer]

Question – 36 [Nov 2019]

Surekha Limited Produces 4,000 litres of paints on a quarterly basis. Each litre requires 2 kg of raw material.
The cost of placing one order for raw material is `40 and the purchasing price of raw material is `50 per kg.
The storage cost and interest cost is 2% and 6% per annum respectively. The lead time for procurement of
raw material is 15 days. Calculate Economic Order Quantity and Total Annual Inventory Cost in respect of
the above raw material.
[Answer - `16,03,200]

Question – 37 [SM]
SK Ltd. buys its annual requirement of 36,000 units in 6 instalments. Each unit costs `1 and the ordering cost
is `25. The inventory carrying cost is estimated at 20% of unit value. Find the total annual cost of the
existing inventory policy. Calculate, how much money can be saved by economic order quantity?
[Answer - `750; `150]

Question – 38 [Nov 2020]

An automobile company purchases 27,000 spare parts for its annual requirements. The cost per order is `240
and the annual carrying cost of average inventory is 12.5%. Each spare part costs `50.

At present, the order size is 3,000 spare parts.

(Assume that number of days in a year = 360 days)
Find out:
(i) How much the company’s cost would be saved by opting EOQ model?
(ii) The Re-order point under EOQ model if lead time is 12 days.
(iii) How frequently should orders for procurement be placed under EOQ model?
 30

[Answer – (i) `2,475; (ii) 900 units; (iii) 18.94 days]

Question – 39 [SM]
SK Ltd. produces a product which has a monthly demand of 4,000 units. The product requires a component X
which is purchased at `20. For every finished product, one unit of component is required. The ordering cost
is `120 per order and the holding cost is 10% p.a.

You are required to calculate:

(i) Economic order quantity
(ii) If the minimum lot size to be supplied is 4,000 units, what is the extra cost, the company has to incur?
(iii) What is the minimum carrying cost, the company has to incur?
[Answer – (i) 2,400 units; (ii) `640; (iii) `2,400]

Question – 40 [MTP – Nov 2018]

The annual demand for an item of raw material is 4,000 units and the purchase price is expected to be `90
per unit. The incremental cost of processing an order is `135 and the annual cost of storage is estimated to be
`12 per unit. Compute the optimal order quantity and total relevant cost of this order quantity?
Suppose that `135 as estimated to be the incremental cost of processing an order is incorrect and should have
been `80. All other estimates are correct. Estimate the difference in cost on account of this error?

Assume at the commencement of the period that a supplier offers 4,000 units at a price of `86. The materials
will be delivered immediately and placed in the stores. Assume that the incremental cost of placing the order
is zero and original estimate of `135 for placing an order for the economic batch is correct. Analyze, should
the order be accepted?
[Answer – Cost of error = `864; Not to accept the offer]

Question – 41 [SM]
A company uses three raw materials A, B and C for a particular product for which the following data apply:
Raw Usage per Reorder Price per Delivery period Reorder Minimum
material unit Quantity Kg Min Average Max level level
(Kg) (Kg) (`) (Kg) (Kg)
A 10 10,000 0.10 1 2 3 8,000
B 4 5,000 0.30 3 4 5 4,750
C 6 10,000 0.15 2 3 4 2,000
Weekly production varies from 175 to 225 units, averaging 200 units of the said product. What would be
the following quantities:
(a) Minimum stock of A?
(b) Maximum stock of B?
(c) Re-order level C?
(d) Average stock level of A?
[Answer – (a) 4,000 kg; (b) 7,650 kg; (c) 5,400 kg; (d) 9,000 kg]
 31

Question – 42 [RTP – Nov 2020]

A company uses four raw materials A, B, C and D for a particular product for which the following data
apply:-
Raw Usage Re- Price Delivery Re- Minimum
Material per order per period (in order level (Kg)
unit of Quantity Kg weeks) level
product (Kg) (`) (Kg)
(Kg)
Minimum Average Maximum
A 12 12,000 12 2 3 4 60,000 ?
B 8 8,000 22 5 6 7 70,000 ?
C 6 10,000 18 3 5 7 ? 25,500
D 5 9,000 20 1 2 3 ? ?
Weekly production varies from 550 to 1,250 units, averaging 900 units of the said product. What would be
the following quantities:
(i) Minimum Stock of A?
(ii) Maximum Stock of B?
(iii) Re-order level of C?
(iv) Average stock level of A?
(v) Re-order level of D?
(vi) Minimum Stock level of D?
[Answer – (i) 27,600 kg; (ii) 56,000 kg; (iii) 52,500 kg; (iv) 33,000 kg; (v) 18,750 kg; (vi) 9,750 kg]

Question – 43 [RTP – Nov 2018]

SK Ltd. is the manufacturer of monitor for PCs. A monitor requires 4 units of Part-S. The following are the
details of this operation during 2020:
Average monthly market demand 2,000 Monitors
Ordering cost `1,000 per order
Inventory carrying cost 20% per annum
Cost of Part `350 per part
Normal usage 425 parts per week
Minimum usage 140 parts per week
Maximum usage 710 parts per week
Lead time to supply 3-5 weeks
Compute from the above:
(a) Economic order quantity (EOQ). If the supplier is willing to supply quarterly 30,000 units of Part-S at a
discount of 5%, is it worth accepting?
(b) Re-order level
(c) Maximum level of stock
(d) Minimum level of stock
[Answer – (a) 1,656 units; Accept; (b) 3,550 units; (c) 4,786 units; (d) 1,850 units]
 32

Question – 44 [Nov 2022]

MM Ltd. uses 7500 valves per month which is purchased at a price of `1.50 per unit. The carrying cost is
estimated to be 20% of average inventory investment on an annual basis. The cost to place an order and
getting the delivery is `15. It takes a period of 1.5 months to receive a delivery from the date of placing an
order and a safety stock of 3,200 valves is desired.
You are required to determine:
(i) The Economic Order Quantity (EOQ) and the frequent orders.
(ii) The re-order point
(iii) The Economic Order Quantity (EOQ) if the valve cost `4.50 each instead of 1.50 each.
(Assume a year consist of 360 days)
[Answer – (i) 3,000 valves; 12 days; (ii) 14,450 valves; (iii) 1,733 valves]

Question – 45 [May 2019]

ACE Ltd. produces a product EMM using a material ‘REX’. To produce one unit of EMM 0.80 kg of ‘REX’
is required. As per the sales forecast conducted by the company it will be able to sell 45,600 units of product
EMM in the coming year. There is an opening stock of 3,150 units of product EMM and company desires to
maintain closing stock equal to one month’s forecasted sale. Following is the information regarding material
‘REX’.
Purchase price per kg `25
Cost of placing order `240 per order
Storage cost 2% per annum
Interest rate 10% per annum
Average lead time 8 days
Difference between minimum and maximum lead time 6 days
Maximum usage 150 kg
Minimum usage 90 kg
Opening stock of material ‘REX’ is 2,100 kg and closing stock will be 10% more than opening stock.
Required:
(i) Compute the EOQ and total cost as per EOQ
(ii) Compute the reorder level and maximum level
(iii) If the company places an order of 7,500 kg of REX at a time, it gets 2% discount, should the offer be
accepted?
[Answer – (i) 2,440 kg; `9,37,570; (ii) 1,650 kg; 3,640 kg; (iii) Accept the offer]

Question – 46 [MTP – Nov 2021]

The yearly production of a company’s product which has a steady market is 40,000 units. Each unit of a
product requires 1 kg of raw material. The cost of placing one order for raw material is `1,000 and the
inventory carrying cost is `20 per annum. The lead time for procurement of raw material is 36 days and a
safety stock of 1,000 kg of raw materials is maintained by the company. The company has been able to
negotiate the following discount structure with the raw material supplier:
Order Quantity (kgs) Discount (`)
Upto 6,000 Nil
 33

6,000 – 8,000 4,000

8,000 – 16,000 20,000
16,000 – 30,000 32,000
30,000 – 45,000 40,000
You are required to:
(a) Calculate the re-order point taking 30 days in a month
(b) Prepare a statement showing the total cost of procurement and storage of raw materials after
considering the discount if the company elects to place one, two, four or five orders in the year.
(c) State the number of orders which the company should place to minimize the costs after taking EOQ
also into consideration.
[Answer – (a) 5,000 kg; (b) `3,61,000; `1,70,000; `84,000; `81,000; (c) 20 orders]

Question – 47 [Nov 2018]

M/s SJ Private Limited manufactures 20,000 units of a product per month. The cost of placing an order is
`1,500. The purchase price of the raw material is `100 per kg. The re-order period is 5 to 7 weeks. The
consumption of raw materials varies from 200 kg to 300 kg per week, the average consumption being 250 kg.
The carrying cost of inventory is 9.75% 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
[Answer – (i) 2,000 kg; (ii) 2,100 kg; (iii) 3,100 kg; (iv) 600 kg; (v) 1,850 kg]

Question – 48 [RTP – Nov 2022]

M/s Tanishka Materials Private Limited produces a product which names “ESS”. The consumption of raw
material for the production of “ESS” is 210 kgs to 350 kgs per week. Other information is as follows:
Procurement time 5 to 9 days
Purchase price of raw material `100 per kg
Ordering cost per order `200
Storage cost 1% per month plus `2 per unit per annum
Consider 365 days a year:
You are required to calculate:
(a) Economic order quantity
(b) Re-order level
(c) Maximum level
(d) Minimum level
(e) Average stock level
(f) Number of orders to be placed per year
(g) Total inventory cost
(h) If the supplier is willing to offer 1% discount on purchase of total annual quantity in two orders,
whether offer is acceptable?
 34

(i) If the answer is no, what should be the counter offer w.r.t. percentage of discount?
[Answer – (a) 646 kg; (B) 450 kg; (c) 946 kg; (d) 170 kg; (e) 558 kg; (f) 23 orders; (g) `14,69,122; (h)
not to accept offer; (i) Discount of at least 2.82%]

Question – 49 [MTP – Nov 22]

A company produces a product ‘AB’ by using two raw materials – ‘Material Ae’ and ‘Material Be’ in the
ratio of 5:3.

A sales volume of 50,000 kgs is estimated for the month of December by the managers expecting the trend
will continue for the entire year. The ratio of input and output is 8:5.

Other information about raw material Ae is as follows:

Purchase price `150 per kg
Re-order period 2 to 3 days
Carrying cost 12%

Note: Material Ae is perishable in nature and if not used within 3.5 days of purchase if becomes obsolete.

To place an order for material ‘Ae’ the company has to incur an administrative cost of `375 per order. At
present, material ‘Ae’ is purchased in a lot of 7,500 kgs to avail the discount on purchase. Company works for
25 days in a month and production is carried out evenly.

You are required to calculate:

(a) Economic order quantity (EOQ) for material Ae
(b) Maximum stock level for Material Ae
[Answer – (a) 5,000 kg; (b) 7,000 kg]

Question – 50 [SM]
From the following details, draw a plan of ABC selective control:
Item Units Unit Cost (`)
1 7,000 4.450
2 4,000 19.140
3 1,500 8.900
4 29,000 0.180
5 10,000 9.190
6 40,000 0.450
7 60,000 0.180
8 13,000 0.980
9 10,000 0.205
10 29,000 0.360
11 11,500 6.320
12 4,000 5.220
Assume the following basis for selective control:
 35

`50,000 and above - Category A

`15,000 to `50,000 - Category B
Below `15,000 - Category C
[Answer – Category A – 11, 2, 5; Category B – 1, 12, 6, 3; Category C – 4, 7, 10, 8, 9]

Question – 51 [SM]
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
4,000 100.00 100 100
Classify the items of inventory as per ABC analysis with reasons.
[Answer – C; B; A]

Question – 52 [SM]
The following data are available in respect of material X for the year ended 31st March, 2021.
Opening stock `90,000
Purchases during the year `2,70,000
Closing stock `1,10,000
Calculate:
(i) Inventory turnover ratio, and
(ii) The number of days for which the average inventory is held.
[Answer – (i) 2.5 times; (ii) 146 days]

Question – 53 [SM]
From the following data for the year ended 31st March, calculate the inventory turnover ratio of the two items
and put forward your comments on them.
Material A(`) Material B(`)
Opening stock 10,000 9,000
Purchases during the year 52,000 27,000
Closing stock 6,000 11,000
[Answer – Material A – 7 times; 52 days; Material B – 2.5 times; 146 days]

Question – 54 [Dec 2021]

XYZ Ltd uses two types of raw materials – ‘Material A’ and ‘Material B’ in the production process and has
provided the following data for the year ended on 31st March, 2021:
Particulars Material A (`) Material B (`)
Opening stock as on 1.04.2020 30,000 32,000
Purchases during the year 90,000 51,000
Closing stock as on 31.02.2021 20,000 14,000
 36

(i) You are required to calculate:

a) The inventory turnover ratio of ‘Material A’ and ‘ Material B’
b) The number of days for which the average inventory is held for both materials ‘A’ and ‘B’.
(ii) Based on above calculations, give your comments.
(Assume 360 days in a year)
[Answer – (i) (a) 4 times; 3 times; (b) 90 days; 120 days; (ii) Material A is fast moving]

Question – 55 [May 2018]

The following details are provided by M/s SKU Enterprises for the year ended 31st March, 2018:
Particulars Material – M (`) Material-N (`)
Stock as on 01-04-2017 6,00,000 10,00,000
Stock as on 31-03-2018 4,50,000 7,25,000
Purchases during the year 9,50,000 18,40,000
You are required to:
(i) Calculate Turnover Ratio of both the materials
(ii) Advise which of the two materials is fast moving. (Assume 360 days in a year)
[Answer – (i) 2 times; 2.4 times; (ii) Material N]

Question – 56 [SM]
An invoice in respect of a consignment of chemicals A and B provide the following information:
(`)
Chemical A: 10,000 kgs at `10 per kg 1,00,000
Chemical B: 8,000 kgs at `13 per kg 1,04,000
Basic custom duty @10% (credit is not allowed) 20,400
Railway freight 3,840
2,28,240
A shortage of 500 kg in chemical A and 320 kg in chemical B is noticed due to normal breakages. You are
required to compute the rate per kg of each chemical, assuming a provision of 2% for further deterioration.
[Answer - `12.04; `15.43]

Question – 57 [SM]
M/s SK Ltd trades in chairs. It stocks sufficient quantity of chairs of almost every variety. In year end, the
report of sales manager revealed that M/s SK experienced stock-out of chairs. The stock-out data is as
follows:
Stock-out of chairs No. of times
100 2
80 5
50 10
20 20
10 30
0 33
M/s SK loses `150 per unit due to stock-out and spends `50 per unit on carrying of inventory. Determine
optimum safest stock level.
 37

[Answer – 20 units]

Question – 58 [May 2019]

The following are the details of receipt and issue of material ‘CXE’ in a manufacturing Co. during the month
of April 2019:
Date Particulars Quantity Rate per
(kg) kg
April 4 Purchases 3,000 `16
April 8 Issue 1,000
April 15 Purchases 1,500 `18
April 20 Issue 1,200
April 25 Return to supplier out of purchase made on April 15 300
April 26 Issue 1,000
April 28 Purchase 500 `17
Opening stock as on 01-04-2019 is 1,000 kg @ `15 per kg.
On 30th April, 2019 it was found that 50 kg of material ‘CXE’ was fraudulently misappropriated by the store
assistant and never recovered by the company. Required:
(i) Prepare a store ledger account under each of the following method of pricing the issue:
a) Weighted Average Method
b) LIFO
(ii) What would be the value of material consumed and value of closing stock as on 30-04-2019 as per
these two methods?

Question – 59 [SM]
The following information is provided by SK Ltd. for the fortnight of April, 2022:
Material Exe:
Stock on 1-4-2022, 100 units at `5 per unit
Purchases:
5-4-2022, 300 units at `6
8-4-2022, 500 units at `7
12-4-2022, 600 units at `8
Issues:
6-4-2022, 250 units
10-4-2022, 400 units
14-4-2022, 500 units
Required:
(A) Calculate using FIFO and LIFO methods of pricing issues:
(a) the value of materials consumed during the period
(b) the value of stock of materials on 15-4-2022
(B) Explain why the figures in (a) and (b) in part A of this question are different under the two methods of
pricing of material issues used. You need not draw up the stores ledger.
 38

Question – 60 [SM]
SK Ltd. is recently incorporated start-up company back in the year 2019. It is engaged in creating embedded
products and internet of things ((IoT) solutions for the industrial market. It is focused on innovation, design,
research and development of products and services. One of its embedded products is LogMax, a system on
module (SoM) Carrier board for industrial use. It is a small, flexible and embedded computer designed as per
industry specifications. In the beginning of the month of September 2022, company entered into a job
agreement of providing 4,800 LogMax to Nit, Mandi. Following details w.r.t. issues, receipts, returns of store
department handling Micro-controller, a component used in the designated assembling process have been
extracted for the month of September, 2021:
Sep. 1 Opening stock of 6,000 units at `285 per unit
Sep. 8 Issued 4,875 units to mechanical division vide material requestion no. mech 009/20

Sep. 9 Received 17,500 units @`276 per unit vide purchase order no. 159/2020
Sep. 10 Issued 12,000 units to a technical division vide material requisition no. Tech -21/20
Sep. 12 Returned to stores 2375 units by technical division against material requisition no.
Tech 021/20
Sep. 15 Received 9,000 units @`288 per units vide purchase order no. 160/2020
Sep. 17 Returned to supplier 700 units out of quantity received vide purchase order no.
160/2020
Sep. 20 Issued 9,500 units to technical division vide material requisition no. Tech 165/20
th
On 25 September, 2021, the stock manager of the company expressed his need to leave for his hometown
due to certain contingency and immediately left the job same day. Later, he also switched his phone off.

As the company has the tendency of stock-taking every end of the month to check and report for the loss due
to rusting of the components, the new stock manager, on 30th September, 2021, found that 900 units of Micro-
controllers where missing which was apparently misappropriated by the former stock manager. He, further
reported loss of 300 units due to rusting of the components.

From the above information, you are required to prepare the stock ledger account using ‘Weighted Average’
method of valuing the issues.

Question – 61 [SM]
The following transactions in respect of material Y occurred during the six months ended 30th September:
Month Purchase (units) Price per unit (`) Issued Units
April 200 25 Nil
May 300 24 250
June 425 26 300
July 475 23 550
August 500 25 800
September 600 20 400
Required:
(a) The chief accountant argues that the value of closing stock remains the same no matter which method of
pricing of material issues is used. Do you agree? Why or why not? Explain. Detailed stores ledger are
not required.
(b) State when and why would you recommend the LIFO method of pricing material issues?
 39

Question – 62 [SM]
The following information is extracted from the stores ledger:
Material X
Opening stock Nil
Purchases:
Jan. 1 100 @ `1 per unit
Jan. 20 100 @ `2 per unit
Issues:
Jan. 22 60 for Job W16
Jan. 23 60 for Job W 17
Complete the receipts and issues valuation by adopting the First-in-First-Out, Last-in-First-out and the
weighted average method. Tabulate the values allocated to Job W16 and W17 and the closing stock under the
methods aforesaid.

Question – 63 [SM]
SK Ltd. furnishes the following store transactions for September:
1 Sep Opening balance 25 units value `162.50
4 Sep Issues Req. No. 85 8 units
6 Sep Receipts from B & Co. GRN No. 26 50 units @ `5.75 per unit
7 Sep Issues Req. No. 97 12 units
10 Sep Return to B & Co. 10 units
12 Sep Issues Req. No. 108 15 units
13 Sep Issues Req. No. 110 20 units
15 Sep Receipts from M & Co. GRN No. 33 25 units @ `6.10 per unit
17 Sep Issues Req. No. 121 10 units
19 Sep Received replacement from B & Co. GRN No. 38 10 units
20 Sep Returned from department, material of M & CO. MRR No. 4 5 units
22 Sep Transfer from Job 182 to Job 187 in the dept. MTR 6 5 units
26 Sep Issues Req. No. 146 10 units
29 Sep Transfer from Dept. A to Dept. B MTR 10 5 units
30 Sep Shortage in stock taking 2 units
Write up the priced stores ledger on FIFO method and discuss how would you treat the shortage in stock
taking
 40

Solution Of Practice Questions

Solution - 32
(a) A = 60,000 ÷ 5 = 12,000 kg
O = 400 + 350 = `750
C = 15 + (0.25 × 12) = `18

EOQ = 2 ´ A ´ O =!!×C!,MMM×NBM = 1,000 kg

C CO

(b) Number of orders to be placed = Annual requriement of material = C,MMM = 12 orders

C!,MMM

Order size (EOQ)

@AM @AM
Frequency of order = = = 30 days
I&. &* &.4-.' C!

(c) Total ordering cost = No. of order ´ cost per order = 12 ´ 750 = `9,000
$.4-. Q/R- C,MMM
Total carrying cost = ´ carrying cost per unit p.a. = ´ 18 = `9,000
! !
Total cost = `18,000

Solution – 33
(a) Statement of Cost
Total Order Size Price No. of Cost of Ordering Carrying Total cost
annual (Tonnes) per Orders inventory cost (OC) cost (CC) (PC + OC
requirement (OS) tonne (A÷OS= (PC) (S ´ [(OS÷2)´ P] + CC)
(A) (P) S) (A ´ P) `12,00)
5,000 400 1,200 12.5 or 13 60,00,000 15,600 48,000 60,63,000
500 1,180 10 59,00,000 12,000 59,000 59,71,000
1,000 1,160 5 58,00,000 6,000 1,16,000 59,22,000
2,000 1,140 2.5 or 3 57,00,000 3,600 2,28,000 59,31,600
3,000 1,120 1.666 or 2 56,00,000 2,400 3,36,000 59,38,400
From the above table, it can be verified that total cost is lowest in case when the order size is 1,000 units.
Thus, most economical purchase level is 1,000 units.

(b) If there is not discounts offered than the order size should be equal to EOQ.
!×#×$ !×B,MMM×C,!MM
EOQ = ! %
=! !M%×`C,BMM
= 200 units

Solution – 34
SK PM
(i) A = Annual Requirement 2000 Bags 1280 Bags
O = Ordering cost per order `1200 `1400
 41

C = Carrying cost/unit/annum `480 `560

!×#×$ !×!,MMM×C,!MM !×C,!OM×C,UMM
EOQ =! %
! = 100 bags ! = 80 bags
UOM BAM

(ii) Ordering cost [(A÷EOQ)´O) [(2,000÷100)´1200] = [(1,280÷80)´1400] =

Carrying cost [(EOQ÷2)´C] `24,000 `22,400
Total of ordering and carrying [(100 ÷ 2)´480] = `24,000 [(80 ÷ 2)´560] = `22,400
cost `24,000 + `24,000 = `22,400 + `22,400 =
`48,000 `44,800
(iii) No. of Deliveries i.e; No. of [2,000 ÷ 100] = 20 orders [1,280 ÷ 80] =16 orders p.a.
orders to be placed per year p.a.
[A÷EOQ]

Solution – 35
!×#×$
(i) EQO = !
%
A = 12,000 units
O = `1,800
C = `640 per unit × 18.75% = `120 per unit
!×C!,MMM×C,OMM
EOQ = ! C!M
= 600 units
(ii) Statement showing evaluation of proposal
Particulars Order 600 units Order 3,000 units
Annual purchase cost (`640/608 p.u) 76,80,000 72,96,000
Annual Ordering cost (`1,800 per order) 36,000 7,200
Annual carrying cost (`120/114 per unit) 36,000 1,71,000
Total Cost `77,52,000 `74,74,200
Since the total cost is lower by `2,77,800 in case when the company gets the discount offer of 5%, thus, it is
recommended to accept the discount offer with order size of 3,000 units.

Solution – 36
A = 4,000 × 2 × 4 = 32,000 kg
O = `40
C = 50 × (2% + 6%) = `4
!×#×$ !×@!,MMM×UM
EOQ = ! %
=! U
= 800 kg
Total inventory cost = Purchase cost + Ordering cost + Carrying cost
@!,MMM OMM
= (32,000 × 50) + " OMM
× 40& + " !
× 4& = `16,03,200

Solution – 37
(a) Total ordering cost = 6 orders ´ `25 = `150
@A,MMM C
Total carrying cost = A
× ! × 20% × 1 = `600
Total Cost = `750
 42

!×@A,MMM×!B
(b) EOQ = ! = 3,000 units
!M%×C
@A,MMM
Total ordering cost = @,MMM
× `25 = `300
C
Total carrying cost = 3,000 × ! × 20% × 1 = `300
Total Cost = `600
Saving due to EOQ = `750 - `600 = `150

Solution – 38
(i) Annual requirement (A) = 27,000
Cost per order (O) = `240
Carrying cost per unit p.a. (C) = 50 × 12.5% = `6.25
!×#×$ !×!N,MMM×!UM
EOQ = ! =! = 1,440 units
% A.!B

Statement of Cost
Particulars Order size = 3,000 Order size = 1,440
Purchase cost 27,000 × 50 = 13,50,000 27,000 × 50 = 13,50,000
Ordering cost !N,MMM !N,MMM
@,MMM
× 240 = 2,160 C,UUM
𝑜𝑟18.75 𝑜𝑟 19 × 240 = 4,560
Carrying cost @,MMM C,UUM
!
× 6.25 = 9,375 !
× 6.25 = 4,500
Total cost 13,61,535 13,59,060
Saving due to EOQ = `13,61,535 - `13,59,060 = `2,475

!N,MMM
(ii) Re-order point = Maximum consumption × Maximum time = @AM
× 12 = 900 units
!N,MMM
(iii) Number of orders under EOQ Model = C,UUM
= 18.75 or 19
@AM
Frequency of order = CV
= 18.94 days

Solution – 39

2´ A´O
(i) EQO =
C
A = 4000× 12 = 48000 units
O = `120 per order
C = 20×10% = `2 per order per annum

2 ´ 48000 ´ 120
EOQ = = 2400 units
2
(ii) Statement Showing Determination of various cost
Order 2400 units Order 4000 units
UO,MMM U,OMMM 2,400 1,440
Annual Ordering cost "
!,UMM
´120& " U,MMM ´120&
 43

!,UMM U,MMM
Annual Carrying cost " !
´2& " !
´2&
2,400 4,000
Total Cost 4,800 5,440
Extra Cost includes = `(5550 – 4800) = `640
(iii) Minimum Carrying Cost = `2,400 which is possible at 2,400 units (EOQ)

Solution – 40
!×#×$ !×U,MMM×C@B
EOQ = ! %
=! C!
= 300 units
Relevant cost of this order quantity:
Ordering cost [(4,000 ÷ 300) × 135] 1,800
Carrying cost [(300 ÷ 2) × 12] 1,800
Relevant cost 3,600

!×#×$ !×U,MMM×OM
Revised EOQ = ! %
=! C!
= 231 units
Relevant cost of this order quantity:
Ordering cost [(4,000 ÷ 231) × 80] 1,385
Carrying cost [(231 ÷ 2) × 12] 1,386
Relevant cost 2,826
Difference in cost on account of this error = 3,690 – 2,826 = `864

Statement of Evaluation of Offer

Costs Order Size = 300 Order Size = 4,000
Purchase Cost 4,000 × 90 = 3,60,000 4,000 × 86 = 3,44,000
Ordering Cost U,MMM U,MMM
@MM
× 135 = 1,800 U,MMM
×0=0
Carrying Cost @MM U,MMM
!
× 12 = 1,800 !
× 12 = 24,000
Total Cost 3,63,600 3,68,000
This special offer at `86 per unit should not be accepted as its total cost is higher as compared to original
offer.

Solution – 41
(a) Minimum stock of A = ROL – (Average lead time × Average consumption)
= 8,000 – (2× 200 × 10) = 4,000 kg
(b) Maximum stock of B = ROL + ROQ – (Min. lead time × Min. consumption)
= 4,750 + 5,000 – (3× 175 × 4) = 7,650 kg
(c) Re-order level of C = Max. lead time × Max. consumption
= 4 × 225 × 6 = 5,400 kg
G$W CM,MMM
(d) Average level of A = Minimum level + !
= 4,000 + !
= 9,000 kg
 44

Solution – 42
(i) Minimum stock of A = Re-order level – (Avg. consumption × Avg. delivery time)
= 60,000 – (900 × 12 × 3) = 27,600 kg
(ii) Maximum stock of B = Re-order level + Re-order quantity – (Min. consumption × Min. time)
= 70,000 + 8,000 – (550 × 8 × 5) = 56,000 kg
(iii) Re-order level of C = Maximum consumption × Maximum delivery time
= (1,250 × 6) × 7 = 52,500 kg
G-X&.4-. W3,2(/(;
(iv) Average stock of A = Minimum stock +
!
C!,MMM
= 27,600 + = 33,000 kg
!
(v) Re-order level of D = Maximum consumption × Maximum time
= (1,250 × 5) × 3 = 18,750 kg
(vi) Minimum stock of D = Re-order level – (Avg. consumption × Avg. time)
= 18,750 – (900 × 5 × 2) = 9,750 kg

Solution – 43
(a) A = Annual usage of parts = 2,000 × 4 × 12 = 96,000 units
O = Cost per order = `1,000
C = Carrying cost per unit per annum = 350 × 20% = `70
!×#×$ !×VA,MMM×C,MMM
EOQ = ! %
=! NM
= 1,656 parts (approx.)

The supplier is willing to supply 30,000 units at a discount of 5%, therefore cost of each part shall be
`350 – 5% = `332.50
Statement of Evaluation of Offer
Particulars Order 30,000 units Order 1,656 units
Annual Purchase Cost 96,000×332.5= 3,19,20,000 18,000×350 = 3,36,00,000
Annual Ordering Cost VA,MMM VA,MMM
@M,MMM
𝑜𝑟 4 × 1,000 = 4,000 C,ABA
𝑜𝑟 58 × 1,000 = 58,000
Annual Carrying Cost @M,MMM C,ABA
!
× 332.5 × 20%= 9,97,500 × 350 × 20% = 57,960
!
Total Cost 3,29,21,500 3,37,15,960
Since the total cost under the supply of 30,000 units with 5% discount is lower than that when order size is
1,656 units, therefore the offer should be accepted.

(b) Re-order level = Maximum consumption × Maximum re-order period

= 710 × 5 = 3,550 units
(c) Maximum level = ROL + ROQ – (Minimum consumption × Minimum re-order period)
= 3,550 + 1,656 – (140 × 3 = 4,786 units
(d) Minimum level = ROL – (Normal consumption × Normal re-order period)
= 3,550 – (425 × 4) = 1,850 units
 45

Solution – 44
(i) A = 7,500 ´ 12 = 90,000 valves
O = `15
C = 20% ´ 1.50 = `0.30

EOQ = 2 ´ A ´ O =!!×VM,MMM×CB = 3,000 valves

C M.@M

Number of orders = 90,000 ÷ 3,000 = 30 orders

Frequency of order = 360 ÷ 30 = 12 days.
(ii) Re-order Quantity = Safety stock + (Average consumption ´ Average lead time)
= 3,200 + (7,500 ´ 1.5) = 14,450 valves
(iii) New carrying cost (C) = 20% ´ 4.50 = `0.90

EOQ = 2 ´ A ´ O =!!×VM,MMM×CB = 1,733 valves

C M.VM

Solution – 45
Working Notes:
(1) Production units of EMM = Sales + Closing stock – Opening stock
UB,AMM
= 45,600 + C!
– 3,150 = 46,250 units
(2) Quantity of REX required to produce 1 unit of EMM 0.80 kg
Quantity of REX required to produce 45,000 units of EMM 37,000 kg
Purchase units of REX = Consumption + Closing stock – opening stock
= 37,000 + 2,310 – 2,100 = 37,210 kg
(3) Maximum lead time – Minimum lead time = 6
Max. lead time = 6 + Minimum lead time
=/2/+3+ 0-,4 (/+-Y=,Z/+3+ 0-,4 (/+-
Also, Average lead time = !
=/2. 0-,4 (/+-Y A Y=/2. 0-,4 (/+-
8= !
16 = 2(Min. lead time) + 6
Min. lead time = 5 days
⸫ Max. lead time = 6 + 5 = 11 days

(i) Computation of EOQ

A = 37,210 kg
O = `240
C = (10% + 2%) × 25 = 12% × 25 = `3
!×#×$ !×@N,!CM×!UM
EOQ = ! %
=! @
= 2,440 kg
Total cost at EOQ = Purchase cost + Ordering cost + Carrying cost
@N,!CM !,UUM
= (37,210 × 25) + " !,UUM × 240& + " !
× 3& = `9,37,570

(ii) Reorder level = Maximum usage × Maximum lead time = 150 kg × 11 days = 1,650 kg
Maximum level = Reorder level + Reorder Quantity – (Min. usage × Min. lead time)
 46

= 1,650 + 2,440 – (90 × 5) = 3,640 kg

(iii) New Purchase price after 2% discount = 25 – 2% = `24.50

Total cost at order size of 7,500 kg = Purchase cost + Ordering cost + Carrying cost
@N,!CM N,BMM
= (37,210 × 24.50) + " N,BMM × 240& + " !
× 12% × 24.50& = `9,23,861
With order size of 7,500 kg, company can save `13,700 (`9,37,570 – `9,23,867). Thus, it is recommended
to accept the offer.

Solution – 46
(i) Annual Production = 40,000 units
Annual Consumption of Raw Material = (40,000 units × 1 kg) = 40,000 kg
Reorder point = Safety Stock Level + Normal Usages × Normal Lead Time
æ 40, 000 kg ö
= 1,000 kg + ç ´ 36 days ÷ = 5,000 kg
è 360 days ø
(ii) Statement showing determination of EOQ
Annual No. of Size of Avg. Annual Annual Annual Annual ordering &
Requirement Orders Order Units Ordering Carrying Discount Carrying cost offer
(kg) P.a (kg) (kg) Cost(`) Cost(`) (`) Discount (`)
(A) (B) (C) (A)+(B)-(C)
40,000 1 40,000 20,000 1000 4,00,000 40,000 3,61,000
2 20,000 10,000 2000 2,00,000 32,000 1,70,000
4 10,000 5,000 4000 1,00,000 20,000 84,000
5 8,000 4,000 5000 80,000 4,000 81,000
2´ A´O 2 ´ 40, 000 ´ 100
(iii) EQO = = =2,000 kg
C 2
No discount on purchases, sine the quantity is less than 6,000 kg
UM,MMM !,MMM
Total carrying cost and ordering cost = " !,MMM × 1,000& + " !
× 20& = `40,000
Advise: Optimal order size = 2,000 units
40, 000
Optimal number of orders p.a = = 20 orders
2, 000

Solution – 47
!×#×$
(i) EQO = !
%
A = 250 kg × 52 weeks = 13,000 kg
O = `1,500
C = `100 per kg × 9.75% = `9.75 per kg
!×C@,MMM×C,BMM
EOQ = ! V.NB
= 2,000 kg
 47

(ii) Re-order level = Maximum Consumption × Maximum lead Time

= 300 × 7 = 2,100 kg
(iii) Maximum level = Reorder level + Reorder Qty – (Min consumption × min lead time)
= 2,100 + 2,000 – (200 × 5) = 3,100 kg
(iv) Minimum level = Reorder Level – (Average Consumption × Average Reorder Period)
= 2,100 – (250 × 6) = 600 kg
(v) Average Stock Level = (Minimum level + maximum level)/2
= (3,100 + 600)/2 = 1,850 kg

Solution – 48
Maximum consumption per day = 350 ÷ 7 = 50 kg
Minimum consumption per day = 210 ÷ 7 = 30 kg
Average consumption per day = (50 + 30) ÷ 2 = 40 kg
(a) A = 40 kg ´ 365 = 14,600 kg
O = `200 per order
C = (1% ´ 12 ´ 100) + 2 = `14
!×CU,AMM×!MM
EOQ = ! = 646 kg
CU

(b) Re-order level = Maximum Consumption × Maximum lead Time

= 50 × 9 = 450 kg
(c) Maximum level = Reorder level + Reorder Qty – (Min consumption × min lead time)
= 450 + 646 – (30 × 5) = 946 kg
(d) Minimum level = Reorder Level – (Average Consumption × Average Reorder Period)
= 450 – (40 × 7) = 170 kg
(e) Average Stock Level = (Minimum level + maximum level)/2
= (170 + 946)/2 = 558 kg
#223,0 1&2'3+7(/&2 CU,AMM
(f) Number of order per year = [$W
= AUA
= 22.60 or 23 orders
(g) Total inventory cost = Purchase cost + Ordering cost + Carrying cost
AUA
= (14600 ´ 100) + (23 ´ 200) + " × 14& = `14,69,122
!
(h) New offer price = 100 – 1% = `99
Revised carrying cost = (99 ´ 1% ´ 12) + 2 = `13.88
Revised order quantity = 14600 ÷ 2 = 7,300 kg
Total inventory cost = Purchase cost + Ordering cost + Carrying cost
N@MM
(after discount) = (14600 ´ 99) + (2 ´ 200) + " !
× 13.88& = `14,96,462
Since cost is higher at offer price, thus offer should not be accepted.
(i) Let new price = y
New carrying cost = (y ´ 1% ´ 12) + 2 = 0.12y + 2
Total inventory cost = Purchase cost + Ordering cost + Carrying cost
N@MM
= (14600 ´ y) + (2 ´ 200) + " !
× (0.12𝑦 + 2)&
= 14,600y + 400 + 438y + 7300
 48

= 15,038 + 7,700

\ 14,69,122 = 15,038y + 7,700

y = `97.18
\ Discount per unit = `100 – `97.18 = `2.82
!.O!
Discount % = CMM
× 100= 2.82%

Solution – 49
(a) Annual raw material requirement = 50,000 ´ 12 ´ (8 ÷ 5) = 9,60,000 kg
Material requirement of Ae = 9,60,000 ´ (5 ÷ 8) = 6,00,000 kg
!×#×$ !×A,MM,MMM×@NB
EOQ = ! =! = 5,000 kg
% C!%×CBM
(b) Maximum level for material Ae = ROL + ROQ – (Min. consumption × Min. lead time)
= (Max. consumption × Max. time) + ROQ – (Avg. consumption × Avg. time)
A,MM,MMM A,MM,MMM
=" !B×C!
× 3& + 7,500 - " !B×C!
× 2& = 9,500 kg
Also, since material Ae is perishable in nature and will become obsolete after 3.5 days,
A,MM,MMM
\ Maximum level = " !B×C!
× 3.5& = 7,000 kg
So maximum level will be minimum of the two values i.e. 7,000 kg and 9,500 kg.
\ Maximum level for material Ae = 7,000 kg

Solution – 50
Statement of Total Cost and Classification
Item Units % of Total Unit Cost Total Cost % of Total Category
Units (`) (`) Cost
1 7,000 3.1963 5.00 35,000 9.8378 B
2 24,000 10.9589 3.00 72,000 20.2378 A
3 1,500 0.6849 10.00 15,000 4.2162 B
4 600 0.2740 22.00 13,200 3.7103 C
5 38,000 17.3516 1.50 57,000 16.0216 A
6 40,000 18.2648 0.50 20,000 5.6216 B
7 60,000 27.3973 0.20 12,000 3.3730 C
8 3,000 1.3699 3.50 10,500 2.9513 C
9 300 0.1370 8.00 2,400 0.6746 C
10 29,000 13.2420 0.40 11,600 3.2605 C
11 11,500 5.2512 7.10 81,650 22.9502 A
12 4,100 1.8721 6.20 25,420 7.14151 B
2,19,000 100 3,55,770 100
 49

Solution – 51
Classification of the items of inventory as per ABC analysis is as follows:
(1) 15 number of units of varieties of inventory items should be classified as ‘A’ category item because of
the following reasons:
(a) Constitute 0.375% of total number of varieties of inventory handled by stores, which is minimum as
per given classification in the table.
(b) 50% of total use value of inventory holding (average), which is maximum, according to given table
(c) Highest in consumption, about 85% of inventory usage (in end-product).
(2) 110 number of varieties of inventory items should be classified as ‘B’ category item because of the
following reasons:
(a) Constitute 2.75% of the total number of varieties of inventory items handled by stores of factory.
(b) Requires moderate investment of about 30% of total use value of inventory holding (average).
(c) Moderate in consumption, about 10% of inventory usage (in end product).
(3) 3,875 number of varieties of inventory items should be classified as ‘C’ category item because of the
following reasons:
(a) Constitute 96.875% of total varieties of inventory items handled by stores of factory.
(b) Requires about 20% of total use value of inventory holding (average).
(c) Minimum inventory consumption i.e. about 5% of inventory usage (in end product)

Solution – 52
Cost of raw material consumed = opening stock + Purchases – closing stock
= 90,000 + 2,70,000 – 1,10,000 = `2,50,000
$7-2/25Y10&'/25 VM,MMMYC,CM,MMM
Average stock of material = !
= !
= `1,00,000
G#\ +,(-./,0 1&2'3+-4 !,BM,MMM
Inventory turnover ratio (ITR) = #8-.,5- '(&19 &* +,(-./,0 = C,MM,MMM = 2.5 times
@AB @AB
Average number of days of inventory holding = EFG = !.B
= 146 days

Solution – 53
Particulars Material A Material B
Opening stock 10,000 9,000
Add: Purchases 52,000 27,000
Less: Closing stock (6,000) (11,000)
Material consumed (A) 56,000 25,000
Average stock [(Op + Cl)÷2] (B) 8,000 10,000
Inventory turnover rate (C = A ÷ B) 7 times 2.5 times
Number of days (365 ÷ C) 52 days 146 days
 50

Solution – 54
(i) Calculation of Inventory Turnover Ratio
Particulars Material A Material B
Opening stock 30,000 32,000
Add: Purchases 90,000 51,000
Less: Closing Stock 20,000 14,000
Raw Material Consumed (A) 1,00,000 69,000
$7-2/25Y%0&'/25 @M,MMMY!M,MMM @!,MMMYCU,MMM
Average Stock " & (B) = 25,000 = 23,000
! ! !
Inventory Turnover Ratio (ITR) C,MM,MMM AV,MMM
= 4 times = 3 times
!B,MMM !@,MMM
@AM @AM
Number of days (360 ÷ ITR) = 90 days = 120 days
U @
(ii) Material A is moving faster than Material B.

Solution – 55
(i) Calculation of turnover ratio
Particulars Material M Material N
Turnover Ratio A,MM,MMMYV,BM,MMMXU,BM,MMM CM,MM,MMMYCO,UM,MMMXN,!B,MMM
(A,MM,MMMYU,BM,MMM)/!
=2.09 (CM,MM,MMMYN,!B,MMM)/!
=2.45
%&'( &* '(&19 &* +,(-/.,0 1&2'3+-4
" &
#8-.,5- '(&19 &* +,(-./,0

Average number of days for which @AM @AM

!.MV
= 172.25 days !.UB
= 146.94 days
the average inventory is held
@AM
"E28-2(&.; F3.2&8-. G,(/&&

(ii) Advise
On comparing the two, it can be said that Material M is slow moving as compared to Material N because of
having higher inventory holding period of 172.25 days. Since the inventory holding period is high in both
case then the exact decision should be taken by comparing the same with the industry standards.

Solution – 56
Statement of Cost
Particulars Chemical A Chemical B
Purchase price 1,00,000 1,04,000
Add: Basic custom duty @10% 10,000 10,400
(+) Railway freight 2,133 1,707
(`3,840 in ratio of 5:4 i.e. quantity purchased)

Total Cost (A) 1,12,133 1,16,107

Quantity Purchased 10,000 8,000
(-) Normal breakage (500) (320)
9,500 7,680
(-) Provision for detonation @ 2% (190) (153.6)
 51

Net Quantity (B) 9,310 7,526.4

Total cost per kg (A ÷ B) 12.04 15.43

Solution – 57
Computation of probability of stock out
Stock-out (units) 100 80 50 20 10 0 Total
No. of times 2 5 10 20 30 33 100
Probability 0.02 0.05 0.10 0.20 0.30 0.33 1.00

Statement showing determination of Optimal Stock

Safety Stock-out Expected annual Expected annual Annual Total annual
Stock Units units Prob. stock out units stock out costs holding cost expected cost
100 0 0 0 0 5,000 5,000
80 20 0.02 0.4 60 4,000 4,060
1.0 150
50 0.02
50 1.5 225 2,500 2,875
30 0.05
2.5 375
1.6 240
80 0.02
3 450
20 60 0.05 1,000 2,140
3 450
30 0.10
7.6 1,140
1.8 270
90 0.02
3.5 525
70 0.05
10 4.0 600 500 2,195
40 0.10
2.0 300
10 0.20
11.3 1,695
100 0.02 2 300
80 0.05 4 600
50 0.10 5 750
0 0 2,700
20 0.20 4 600
10 0.30 3 450
18 2,700
It is recommended to maintain safety stock level of 20 units at which total cost is least i.e. `2,140.

Solution – 58
(a) Stores Ledger (Weighted Average Basis)
Receipts Issues Balance
Date
Qty. (kg) Rate (`) Amount Qty. (kg) Rate (`) Amount Qty. (kg) Rate (`) Amount
1-4-19 - - - - - - 1,000 15 15,000
4-4-19 3,000 16 48,000 - - - 4,000 15.75 63,000
8-4-19 - - - 1,000 15.75 15,750 3,000 15.75 47,250
 52

15-4-19 1,500 18 27,000 - - - 4,500 16.50 74,250

20-4-19 - - - 1,200 16.50 19,800 3,300 16.50 54,450
25-4-19 - - - 300 18 5,400 3,000 16.35 49,050
26-4-19 - - - 1,000 16.35 16,350 2,000 16.35 32,700
28-4-19 500 17 8,500 - - - 2,500 16.48 41,200
30-4-19 - - - 50 16.48 824 2,450 16.48 40,376

(b) Stores Ledger (LIFO)

Receipts Issues Balance
Date
Qty. (kg) Rate (`) Amount Qty. (kg) Rate (`) Amount Qty. (kg) Rate (`) Amount
1-4-19 - - - - - - 1,000 15 15,000
1,000 15 15,000
4-4-19 3,000 16 48,000 - - -
3,000 16 48,000
1,000 15 15,000
8-4-19 - - - 1,000 16 16,000
2,000 16 32,000
1,000 15 15,000
15-4-19 1,500 18 27,000 - - - 2,000 16 32,000
1,500 18 27,000
1,000 15 15,000
20-4-19 - - - 1,200 18 21,600 2,000 16 32,000
300 18 5,400
1,000 15 15,000
25-4-19 - - - 300 18 5,400
2,000 16 32,000
1,000 15 15,000
26-4-19 - - - 1,000 16 16,000
1,000 16 16,000
1,000 15 15,000
28-4-19 500 17 8,500 - - - 1,000 16 16,000
500 17 8,500
1,000 15 15,000
30-4-19 - - - 50 17 850 1,000 16 16,000
450 17 7,650

(ii) Value of Material Consumed and Closing Stock

Weighted Average LIFO Method (`)
Method (`)
Opening stock as on 01-04-2019 15,000 15,000
Add: Purchases 83,500 83,500
Less: Return to supplier (5,400) (5,400)
Less: Abnormal loss (824) (850)
Less: Closing stock as on 30-04-2019 (40,376) (38,650)
Value of material consumed 51,900 53,600
 53

Solution – 59
(A) Statement of receipts and issues using FIFO
Receipts Issues Balance
Date
Qty. (kg) Rate (`) Amount Qty. (kg) Rate (`) Amount Qty. (kg) Rate (`) Amount
1-4-23 - - - - - - 100 5 500
100 5 500
5-4-23 300 6 1800 - - -
300 6 1800
100 5 500
6-4-23 - - - 150 6 900
150 6 900
150 6 900
8-4-23 500 7 3500 - - -
500 7 3500
150 6 900
10-4-23 - - - 250 7 1750
250 7 1750
250 7 1750
12-4-23 600 8 4800 - - -
600 8 4800
250 7 1750
14-4-23 - - - 350 8 2800
250 8 2000
The value of material consumed = (500 + 900) + (900 + 1750) + (1750 + 2000) = `7,800
Balance of material as on 15-4-2023 = `2800

Statement of receipts and issues using LIFO

Receipts Issues Balance
Date
Qty. (kg) Rate (`) Amount Qty. (kg) Rate (`) Amount Qty. (kg) Rate (`) Amount
1-4-23 - - - - - - 100 5 500
100 5 500
5-4-23 300 6 1800 - - -
300 6 1800
100 5 500
6-4-23 - - - 250 6 1500
50 6 300
100 5 500
8-4-23 500 7 3500 - - - 50 6 300
500 7 3500
100 5 500
10-4-23 - - - 400 7 2800 50 6 300
100 7 700
100 5 500
50 6 300
12-4-23 600 8 4800 - - -
100 7 700
600 8 4800
14-4-23 - - - 500 8 4000 100 5 500
 54

50 6 300
100 7 700
100 8 800
The value of material consumed = 1,500 + 2,800 + 4,000 = `8,300
Balance of material as on 15-4-2023 = 500 + 300 + 350 + 800 = `2,300

(B) On 6-4-2023, 250 units were issued to production. Under FIFO their value comes to `1,400 and under
LIFO its `1,500. Hence, `100 more was charged to production under LIFO.

On 10-4-2023, 400 units were issued to production. Under FIFO their value comes to `2,650 and
under LIFO its `2,800. Hence, `150 more was charged to production under LIFO.

On 14-4-2023, 500 units were issued to production. Under FIFO their value comes to `3,750 and
under LIFO its `4,000. Hence, `250 more was charged to production under LIFO.

Thus, the total excess amount charged to production under LIFO comes to `500.

The difference of `500 (2,800 – 2,300) in value of closing stock is due to following reasons:
(a) In case of FIFO, all the 350 units of the closing stock belongs to the purchase of material made on
12-4-2023, whereas under LIFO these units were from opening balance and purchases made on 5-
4-2023, 8-4-2023 and 12-4-2023.
(b) Due to different purchase price paid by the concern on different days of purchase, the value of
closing stock differed under FIFO and LIFO. Under FIFO 350 units of closing stock were valued
@ `8 per unit whereas under LIFO first 100 units were valued @`5 per unit, next 50 units @`6
per unit, next 100 units @`7 per unit and last 100 units@`8 per unit.

Solution – 60
Date Receipts Issues Balance
Sep. Qty. (kg) Rate (`) Amount Qty. (kg) Rate (`) Amount Qty. (kg) Rate (`) Amount
1 - - - - - - 6,000 285.00 17,10,000
8 - - - 4,875 285.00 13,89,375 1,125 285.00 3,20,625
9 17,500 276.00 48,30,000 - - - 18,625 276.54 51,50,625
10 - - - 12,000 276.54 33,18,480 6,625 276.54 18,32,145
12 2,375 276.54 6,56,783 - - - 9,000 276.54 24,88,928
15 9,000 288.00 25,92,000 - - - 18,000 282.27 50,80,928
17 - - - 700 288.00 2,01,600 17,300 282.04 48,79,328
20 - - - 9,500 282.04 26,79,380 7,800 282.04 21,99,948
30 - - - 900* 282.04 2,53,836 6,900 282.04 19,46,112
30 - - - 300** - - 6,600 294.87 19,46,112
*900 units is abnormal loss, hence it will be transferred to costing P&L account.
 55

**300 units is normal loss, hence it will be absorbed by good units.

Solution – 61
Assumption – No opening stock on 1st January
Materials cost and control
Month Opening balance Purchase Issued Units (`) Closing Balance
January Nil 200 Nil 200
February 200 300 250 250
March 250 425 300 375
April 375 475 550 300
May 300 500 800 Nil
June Nil 600 400 200
At the end of May, there was no closing stock, i.e. no opening stock on June. But there was closing stock
of 200 units at the end of June.
Value of closing stock at the end of June:
FIFO – 200 units @ `20 = `4,000
LIFO – 200 units @ `20 = `4,000
Weighted average – 200 units @ `20 = `4,000
Hence the argument of the Chief Accountant is correct. He is correct only in the above case. If there was
closing stock at the end of May, the argument of the Chief Accountant would not have been correct.

Solution – 62
Statement of receipts and issues using FIFO
Receipts Issues Balance
Date
Qty. (kg) Rate (`) Amount Qty. (kg) Rate (`) Amount Qty. (kg) Rate (`) Amount
Jan 1 100 1 100 - - - 100 1 100
100 1 100
Jan 20 100 2 200 - - -
100 2 200
40 1 40
Jan 22 - - - 60 1 60
100 2 200
40 1 40
Jan 23 - - - 80 2 160
20 2 40

Statement of receipts and issues using LIFO

Receipts Issues Balance
Date
Qty. (kg) Rate (`) Amount Qty. (kg) Rate (`) Amount Qty. (kg) Rate (`) Amount
Jan 1 100 1 100 - - - 100 1 100
100 2 200
Jan 20 100 2 200 - - -
100 1 100
 56

40 2 80
Jan 22 - - - 60 2 120
100 1 100
40 2 80
Jan 23 - - - 80 1 80
20 1 20

Statement of receipts and issues using Weighted Average

Receipts Issues Balance
Date
Qty. (kg) Rate (`) Amount Qty. (kg) Rate (`) Amount Qty. (kg) Rate (`) Amount
Jan 1 100 1 100 - - - 100 1 100
Jan 20 100 2 200 - - - 200 1.50 300
Jan 22 - - - 60 1.50 90 140 1.50 210
Jan 23 - - - 60 1.50 90 80 1.50 120

Statement of Required Data

FIFO (`) LIFO (`) Weighted Average (`)
Material for Job W16 60 120 90
Material for Job W17 80 100 90
Closing stock 160 80 120

Solution – 63
Requisition
GRN/ Receipt Issue Balance
Date No.
MRN
Qty Rate Amount Qty Rate Amount Qty Rate Amount
1 Sep - - - - - - - - 25 6.50 162.5
4 Sep - - - - 85 8 6.5 52 17 6.50 110.5
17 6.50 162.50
6 Sep 26 50 5.75 287.50 - - - -
50 5.75 287.50
5 6.50 32.50
7 Sep - - - - 97 12 6.50 78
50 5.75 287.50
5 6.50 32.50
10 Sep - - - - - 10 5.75 57.50
40 5.75 230
5 6.50 32.50
12 Sep - - - - 108 30 5.75 172.50
10 5.75 57.50
13 Sep - - - - 110 20 5.75 115 10 5.75 57.50
10 5.75 57.50
15 Sep 33 25 6.10 152.50 - - - -
25 6.10 152.50
17 Sep - - - - 121 10 5.75 57.50 25 6.10 152.50
25 6.10 152.50
19 Sep 38 10 5.75 57.50 - - - -
10 5.75 57.50
 57

5 5.75 28.75
20 Sep 4 5 5.75 28.75 - - - - 25 6.10 152.50
10 5.75 57.50
5 5.75 28.75 20 6.10 122
26 Sep - - - - 146
5 6.10 30.50 10 5.75 57.50
18 6.10 109.80
30 Sep - - - - Shortage 2 6.10 12.20
10 5.75 57.50
Working Notes:
(a) The material received as replacement form vendor is treated as fresh supply
(b) In the absence of any information, the price of the material returned from a user department on 20 Sep
has been taken at the price of the latest issue made on 17 Sep. In FIFO method, physical flow of the
material is irrelevant and issue price is based on first in first out.
(c) The issue of material on 26 Sep is made out of the material received from a user department on 20 Sep.
(d) The entries for transfer of material from one job to another on 22 Sep and 29 Sep do not affect the store
ledger. Hence no entries are passed in its respect.
(e) The material found short as a result of stock taking has been written off at relevant issue price.