Notes And Study Material for Exam Papers

Problem  From the following information, you are required to determine: (a) Ordering Point or Re-order Level (b) Minimum Limit or Minimum Stock Level (c) Maximum Limit or Maximum Stock Level (d) Danger Level Maximum daily requirement                              800 units Time required to receive emergency                                                 supplies            4 days Average daily requirement                       ...

Standard Cost Method Sometimes materials are charged in the factory at an estimated price which represents the normal price. This price is also known as pre-determined price or budgeted price or standard price or standard cost. The determination of a standard price is difficult because prices are controlled by market conditions than by the Board of Directors of the manufacturing company. The standard price is not fixed for all time but it is kept under constant review and is always subject to adjustments for regular increase or decrease in prices. The standard cost of a material may or may not always coincide with actual price paid. In case the two prices differ, a standard price variance occurs. Problem : 5,00 units of Material-C 5 with a standard price of Rs. 250 are purchased at Rs. 258. Calculate standard price variance and the unit cost difference. Solution: Quantity            Units     Unit cost ...

The records of Derajat Manufacturing Co. Ltd. show the following data relative to material no: E-4: Balance: February,        1, 1967             700 units at Rs. 20.50 Purchases: February     3, 1967             800 units at Rs. 21.00                                     12, 1967          400 units at Rs. 22.00                                     24, 1967          200 units at Rs. 21.50 ...

The records of Rajshahi Manufacturing Co. Ltd. show the following data relative to Material No: R-172: Balance: April 1, 1967 …2,700 units at Rs. 41 Received: April 4, 1967 ….2, 800 units at Rs. 42                         13, 1967….2, 400 units at Rs. 44                         25, 1967….2, 200 units at Rs. 43 Issued: April 3, 1967 ……2, 500 units                         19, 1967….2, 600 units                         30, 1967….2, 200 units Instruction: Find out the inventory balance and the cost of issue of the mater...

The Sanghar Manufacturing Co. Ltd. reports purchases and issues of material no: Special – C as under:                         Purchases                                 Issued Date                  Units                 Unit Price          Units                                               ...

Records of the Sylhet Co. Ltd. show the following data relative to Material No. e—71: Balance: July 1, 1967 … 1,050 units at Rs. 10/25 Purchases: July 3, 1967 … 1,200 units at Rs. 10/50                         12, 1967 … 600 units at Rs. 11/00                         24, 1967 … 300 units at Rs. 10/75 Issued:  July 2, 1967 … 750 units                   18, 1967 … 900 units                   29, 1967 … 300 units Required: calculate the inventory balance and the cost of the material issued on each of the following bases: (1) Last-in, first-out, Perpetual inventories are maintaine...

The records of the Khulna Manufacturing Co. Ltd. Show the following data relative to Material No: B—198: Balance: March 1, 1967            1,350 units at Rs. 20.50 Received: March 4, 1967          1,400 units at Rs. 21.00                          13, 1967         1,200 units at Rs. 22.00                          25, 1967         1,100 units at Rs. 21.50 Issued:      March 3, 1967         1,250 units                    ...

Problem: With the help of the following data calculate the cost of the ending inventory of Material No: c—154 on the basis of the most recent costs (fifo). Solution:           Material No: C—154

Generally raw materials form a very big proportion of the total cost of production. Materials costing involves the determination of the cost of materials acquired, the cost of materials issued and the cost of the inventory. Cost of materials acquired (also called the ‘acquisition cost’) includes the net price paid to the vendor plus freight-in plus the costs of maintaining the purchasing department, the stores department, the accounting department and the costs of inspection, testing and insurance. A great proportion of the requisition costs consists of fixed expenses.  On account of this fixed factor and also on account of various complications, generally the materials are priced at the net amount paid to the seller. It does not mean that the cost referred to above is in any case not relevant to the concept of acquisition cost. This extra cost is generally charged to production as manufacturing overhead. Generally the perpetual inventory system is used because it ensures...

Problem 5: The Rustam Company has developed the following data to assist in controlling one of its inventory items: Economic Order Quantity: 1000 Kg Average daily use: 100 Kg Minimum daily use: 80 Kg Maximum daily use: 120 Kg Working days per year 250 days Safety stock  400 Kg Cost of carrying Inventory  Rs. 1.00 per Kg. per year Lead Time 7 working days Required: (i) Order Point (ii) Average Inventory (iii) Normal Maximum Inventory (iv) Absolute Maximum Inventory (v) Cost of Placing one order. Solution: (i) Order Point = Normal daily use x lead time + safety stock Order Point = (100 x 7) + 400 = 1100 Kg. Inventory Turn Over: Inventory turnover is a ratio of the value of materials used or finished goods sold during a certain period to the average inventory of materials or finished goods held during the period. In the form of formula, it may be written as following:

Problem 4: The ABC Company provides the following information: Estimated requirements for next year: 2400 units Per unit Cost: Rs. 150 Ordering Cost (Per order): Rs. 20 Carrying Cost: 10% From the above information you are required to calculate: (a) Economic Order Quantity (b) The Number of orders to be placed per year (c) The Frequency of orders (d) Prove your answer Solution: * From the above table, it is clear that if 3 orders are placed per year according to the Economic Order Quantity of 800 units per order; then the total cost (carrying + order cost) comes to Rs. 120 which is the lowest of all other different combinations. Hence it is proved that the most Economic Order Quantity is 800 units. Note: When 800 units (EOQ) are purchased the ordering costs and carrying costs are equal.

Problem 1: Normal usage: 100 units per day Maximum usage: 130 units per day Minimum usage: 70 units per day Economic Order Quantity:5000 units Re-order Period: 25 to 30 days From the above information you are required to calculate: (i) Re-order Level (ii) Minimum Level (iii) Maximum Level Solution: (i) Re-order Level = Maximum daily usage × Maximum Re-order period Reorder Level = 130 × 30 = 3900 units (ii) Minimum Level = Re-order Level – Average usage for average re-order period. Minimum Level = 3900 – (100 × 27.5) Minimum Level = 3900 – 2750 = 1150 units (iii) Maximum Level = Re-order Level – Minimum quantity used in re-order period + Economic Order Quantity Maximum Level = 3900 – (70 × 25) + 5000 Maximum Level = 3900 – 1750 + 5000 = 7150 units Problem 2: Two types of materials A and B are used as follows: Minimum usage: 20 units per week each Normal usage: 40 units per week each Maximum usage: 60 units per week each Re-order Qu...

From the following information, you are required to determine: (a) Ordering Point or Re-order Level (b) Minimum Limit or Minimum Stock Level (c) Maximum Limit or Maximum Stock Level (d) Danger Level Maximum daily requirements                             800 units Time required receiving emergency supplies       4 days Average daily requirement                                 700 units Minimum daily requirement                               600 units Time required for fresh supply   ...

Inventory Quantity Standards 1.         Ordering Level or Ordering Point or Re-ordering Level: This is that level of material at which a new order for supply of material is to be placed. In other words, at this level a purchase requisition is made out. This level is fixed some where between maximum and minimum levels. Order points are based on usage during time necessary to requisition order, and receive materials, plus an allowance for protection against stock out. The order point is reached when inventory on hand and quantities due in are equal to the lead time usage quantity plus the safety stock quantity. The following two formulas are used for the calculation of re-ordering level or point: (i) Ordering Point or Re-order level = Maximum daily or weekly or monthly usage × lead time (Lead time would mean the time required to get fresh or new supply of material) The above formula is used when usage and lead time are known wi...

Material control is the system that ensures the provision of the required quantity of material of the required quality at the required time with the minimum of capital investment. It covers the following functions: (i) Stock control (ii) Scheduling of requirements (iii) Purchasing (iv) Receiving and inspecting (v) Storing and issuing. Need for Material Control: One of the first steps in the installation of a cost system is planning the proper control of materials and supplies from the time orders are placed with supplier until they have been consumed in plant and office operation or have been sold as merchandise. Material represents an important asset and is the largest single item of cost in almost every business; accordingly, the success or failure of a concern may depend largely upon efficient material purchasing, storage, accounting, utilisation and control. Where materials are not properly controlled, excess stock of some items are likely to occur with a re...

The science of cost accounting has developed primarily to serve the needs of the management. The techniques of cost accounting are the best tools by which management may conduct a business towards profitable operations. It is so much allied to management that it is difficult to indicate where the cost accounting ends and managerial control begins. Cost Accounting has many advantages. The following are the most important advantages of a good cost accounting system: 1.         Profitable and unprofitable Activities: In Cost Accounting profitable and unprofitable activities are disclosed. Management can take steps to eliminate or to reduce those activities from which little or no profit is earned. It can change the method of production in order to render such activities more profitable. 2.         Classification and Subdivision of costs: Costs are accumulated and classified by every possible div...

The function of every accounting is to provide financial information for different parties. Both financial accounting and cost accounting are concerned with the accumulation and presentation of information to serve the needs of management and outsiders. The source of the two accounts recording the transactions is the same. Cost Accounting is based on the same principles regarding debit and credit as are applied in financial accounting. However, the two differ in their purpose and scope. The following are the important points of difference: 1.         Purpose: Cost Accounting and financial accounting have different purposes. Financial Accounting provides information about the enterprise in a general way. It safeguards the interests of business and other parties by providing suitable information in the financial statements i.e. Profit and Loss Account and Balance Sheet. Cost Accounting gives information for the guidance of the managemen...