PRACTICE MANUAL – COST AND MANAGEMENT

ACCOUNTING CHAPTER 02

CHAPTER 2 – MATERIAL COST

Q.1 Distinguish between bill of material and material requisition note.

[CA Inter May 2012, 4 Marks]
Answer:

Bills of material Material Requisition Note

1. It is document by the drawing office 1. It is prepared by the foreman of the
consuming department.
2. It is a complete schedule of component 2. It is a document authorizing Store-
parts and raw materials required for a Keeper to issue Material to the
particular job or work order. consuming department.

3. It often serves the purpose of a Store 3. It cannot replace a bill of material.

Requisition as it shown the complete
schedule of materials required for a
particular job i.e. it can replace stores
requisition.
4. It can be used for the purpose of 4. It is useful in arriving historical cost
quotation only.
5. It helps in keeping a quantitative control 5. It shows the material actually drawn
on materials draw through stores from stores.
Requisition.

Q.2 Write treatment of items associated with purchase of material:

(i) Cash discount
(ii) Subsidy/Grant/Incentives
(iii) VAT or State Sales Tax
(iv) Commission/ brokerage paid [CA Inter May 2016, 4 Marks]

Answer:
Treatment of items associated with purchase of material
Sl. No. Items Treatment
(i) Cash discount Cash discount is not deducted from the purchase
price.
(ii) Subsidy/Grant/Incentives Any subsidy/ grant/ incentive received from the
Government or from other sources deducted from
the cost of purchase.

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(iii) VAT or State Sales Tax State Sales Tax/VAT is paid on intra-state sale
and collected from the buyers. It is excluded from
the cost of purchase if credit for the same is
available. Unless mentioned specifically it should
not form part of cost of purchase.
(iv) Commission or Commission or brokerage paid is added with the
brokerage paid cost of purchase.

Q.3 State how the following items are treated in arriving at the value of cost of material
Purchased
(i) Detention Charges/Fines
(ii) Demurrage
(iii) Cost of Returnable containers
(iv) Central Goods and Service Tax (CGST)
(v) Shortage due to abnormal reasons. [CA Inter Jan 2021, 5 Marks]

Answer:
Treatment of items in arriving at the value of cost of material Purchased
S. No. Items Treatment
(i) Detention charges/ Detention charges/ fines imposed for non- compliance
Fine of rule or law by any statutory authority. It is an
abnormal cost and not included with cost of purchase.

(ii) Demurrage Demurrage is a penalty imposed by the transporter for

delay in uploading or offloading of materials. It is an
abnormal cost and not included with cost of purchase.

(iii) Cost of returnable Treatment of cost of returnable containers are as

containers follows:
Returnable Containers: If the containers are returned
and their costs are refunded, then cost of
Containers should not be considered in the cost of
purchase.
If the amount of refund on returning the container is less
than the amount paid, then, only the short fall is added
with the cost of purchase.
(iv) Central Goods and Central Goods and Service Tax (CGST) is paid on
Service Tax (CGST) manufacture and supply of goods and collected from
the buyer. It is excluded from the cost of purchase if the
input credit is available for the same. Unless mentioned
specifically CGST is not added with the cost of
purchase.
(v) Shortage due Shortage arises due to abnormal reasons such as
to abnormal reasons material mishandling, pilferage, or due to any avoidable
reasons are not absorbed by the good units. Losses
due to abnormal reasons are debited to costing profit
and loss account.

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ACCOUNTING CHAPTER 02

Q.4 Distinguish between 'Bin Card' and 'Stores Ledger'.

[CA Inter Nov 2017, Nov 2004,May 2003,May 2002, 4 Marks]
Answer:
Difference between Bin Card & Stores Ledger
Bin Card Stores Ledger
(i) It is maintained by the storekeeper in It is maintained in costing department.
the store.
(ii) It contains only quantitative details of It contains information both in quantity
material received, issued and and value.
returned to stores.
(iii) Entries are made when transactions It is always posted after the
take place. transaction.
(iv) Each transaction is individually Transactions may be summarized and
posted. then posted.
(v) Inter-department transfers do not Material transfers from one job to
appear in Bin Card. another job are recorded for costing
purposes.

Q.5 Define Inventory Control and give its objectives. List down the basis to be adopted for
Inventory Control. [CA Inter Nov 2019, 5 Marks]

Answer:
(i) Inventory Control: The Chartered Institute of Management Accountants (CIMA) defines
Inventory Control as “The function of ensuring that sufficient goods are retained in stock to
meet all requirements without carrying unnecessarily large stocks.”
(ii) The objective of inventory control is to make a balance between sufficient stock and over-
stock. The stock maintained should be sufficient to meet the production requirements so
that uninterrupted production flow can be maintained. Insufficient stock not only pause the
production but also cause a loss of revenue and goodwill. On the other hand, Inventory
requires some funds for purchase, storage, maintenance of materials with a risk of
obsolescence, pilferage etc. A trade-off between Stock-out and Over-stocking is required
The management may employ various methods of Inventory control to have a balance.
(iii) Management may adopt the following basis for Inventory control

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Q.6 Explain 'Just in Time' (JIT) approach of inventory management

[CA Inter May 2018, 5 Marks]
Answer:
(i) JIT is a system of inventory management with an approach to have a zero inventories in
stores. According to this approach material should only be purchased when it is actually
required for production.
(ii) JIT is based on two principles
• Produce goods only when it is required and
• The products should be delivered to customers at the time only when they want.
(iii) It is also known as ‘Demand pull’ or ‘pull through’ system of production. In this system,
production process actually starts after the order for the products is received. Based on the
demand, production process starts and the requirement for raw materials is sent to the
purchase department for purchase. This can be understood with the help of the following

Q.7 Discuss ABC analysis as a technique of inventory control.

[CA Inter May 2000, Nov 2004, Nov 2011, 4 Marks]
Answer:
(i) It is a system of inventory control. It exercises discriminating control over different items of
stores classified on the basis of investment involved. Usually they are divided into three
categories according to their importance, namely, their value and frequency of
replenishment during a period.
(ii) ‘A’ category of items consists of only a small percentage i.e. about 10% of total items
handles by the stores but require heavy investment about 70% of inventory value, because
of their high price or heavy requirement or both.
(iii) ‘B’ category of items are relatively less important – 20% of the total items of material handled
by stores and % of investment required is about 20% of total investment in inventories.
(iv) ‘C’ category – 70% of total items handled and 10% of value.
(v) For ‘A’ category items, stocks levels and EOQ are used and effective monitoring is done.
For ‘B’ category same tools as in ‘A’ category are applied.
(vi) For ‘C’ category of items, there is no need of exercising constant control. Orders for items
in this group may be placed after 6 months or once in a year, after ascertaining consumption
requirement.

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Q.8 “Perpetual inventory system comprises Bin Card and Stores Ledger, but the efficacy of the
system depends on continuous stock taking.” Comment. [CA Inter May 2013, 4 Marks]

Answer:
(i) Perpetual Inventory system represents a system of records maintained by the stores
department. Records comprise of (i) Bin Cards and (ii) Stores Ledger. Bin Card maintains
a quantitative record of receipts, issues and closing balances of each item of stores. Like a
bin card, the Stores Ledger is maintained to record all receipt and issue transactions in
respect of materials.
(ii) It is filled up with the help of goods received note and material requisitions. But a perpetual
inventory system’s efficacy depends on the system of continuous stock taking. Continuous
stock taking means the physical checking of the records i.e. Bin cards and store ledger with
actual physical stock. Perpetual inventory is essentially necessary for material control. It
incidentally helps continues stock taking.
(iii) The main advantages of continuous stock taking are as follows:
a. Physical stocks can be counted and book balances adjusted as and when desired
without waiting for the entire stock-taking to be done.
b. Quick compilation of Profit and Loss Accounts (for interim period) due to prompt
availability of stock figures.
c. Discrepancies are easily located and thus corrective action can be promptly taken to
avoid their recurrence.
d. A systematic review of the perpetual inventory reveals the existence of surplus,
dormant, obsolete and slow-moving materials, so that remedial measures may be
taken in time.
e. Fixation of the various levels and check of actual balances in hand with these levels
assist the Storekeeper in maintaining stocks within limits and in initiating purchase
requisitions for correct quantity at the proper time.

Q.9 Explain FIFO and LIFO method of stores issue. [CA Inter May 2018, 2.5 Marks]

Answer:
(i) First-in First-out (FIFO) method: It is a method of pricing the issues of materials, in the
order in which they are purchased. In other words, the materials are issued in the order in
which they arrive in the store or the items longest in stock are issued first. Thus each issue
of material only recovers the purchase price which does not reflect the current market price.
This method is considered suitable in times of falling price because the material cost
charged to production will be high while the replacement cost of materials will be low.
(ii) Last-in-First-out (LIFO) method: It is a method of pricing the issues of materials. This
method is based on the assumption that the items of the last batch (lot) purchased are the
first to be issued. Therefore, under this method the prices of the last batch (lot) are used for
pricing the issues, until it is exhausted, and so on. If however, the quantity of issue is more

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than the quantity of the latest lot than earlier (lot) and its price will also be taken into
consideration. During inflationary period or period of rising prices, the use of LIFO would
help to ensure that the cost of production determined on the above basis is approximately
the current one.

Q.10 Discuss accounting treatment of spoilage and defectives in cost accounting.

[CA Inter Nov 2015, May 2009,Nov 2008,Nov 2005,Nov 2003, 4 Marks]
Answer:
(i) Spoilage is the tem used for materials which are badly damaged in manufacturing
operations, and it cannot rectified economically and hence taken out of the process to be
disposed of in some manner without further processing.
(ii) Normal spoilage costs are included in costs either charging it to production order or by
charging it to production overheads so that it is spread over all products. Any value realized
from spoilage is credited to production order or production overhead account as the case
may be.
(iii) Cost of abnormal spoilage is charged to costing P/L A/c.
(iv) Defectives: Signifies those units or portions of production which can be rectified and turned
cut as good units by application of additional material, labour or other service. Defectives
are charged to general overheads or department overheads depending upon their
traceability. They are charged to good production, when second have a normal value and
defective rectified into ‘second’ or ‘first’ are normal. Costing P/L A/c – in case of abnormal
nature .

Q.11 Explain obsolescence and circumstances under which materials become obsolete. State
the steps to be taken for its treatment. [CA Inter Nov 2018, 5 Marks]

Answer:
(i) Obsolescence: Obsolescence is defined as “the loss in the intrinsic value of an asset due
to its supersession”.
(ii) Materials may become obsolete under any of the following circumstances:
a. where it is a spare part, or a component of a machinery used in manufacture and that
machinery becomes obsolete;
b. where it is used in the manufacture of a product which has become obsolete;
c. where the material itself is replaced by another material due to either improved quality
or fall in price.
(iii) Treatment: In all three cases, the value of the obsolete material held in stock is a total loss
and immediate steps should be taken to dispose it off at the best available price. The loss
arising out of obsolete materials on abnormal loss does not form part of the cost of
manufacture.

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ACCOUNTING CHAPTER 02

Q.12 Differentiate between “scrap” and “defectives” and how they are treated in cost
accounting. [CA Inter Nov 2015, Nov 2008 5 Marks]

Answer:
(i) Scrap: Scrap is incidental residence from certain type of manufacture, usually of small
amount and low value, recoverable without further processing.The cost of scrap is borne by
good units and income scrap is treated as other income.
(ii) Defectives: Defectives are portion of production which can be rectified by incurring
additional cost. Normal defectives can be avoided by quality control. Normal defectives are
charged to good products. Abnormal defectives are charged to Costing Profit and Loss
Account.

Q.13 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. [CA Inter Nov 2019, Nov 2009 5 Marks]
Answer
Working:
(i) Calculation of Annual demand of raw material
= 4,000 Litres (per quarter) x 4 (No. of Quarter in a year) x 2 kg. (raw material required for each Litre
of paint)
= 32,000 kg.
(ii) Calculation of Carrying cost
Storage rate = 2%
Interest Rate = 6%
Total = 8% per annum
Carrying cost per unit per annum = 8% of `50= 4 per unit per annum

(iii) EOQ =

=
= 800 Kg
(iv) Total Annual Inventory Cost (Amount in Rs.)
Purchasing cost of 32,000 kg @ ` 50 per kg = 16, 00,000
Ordering Cost (32,000Kg/800Kg*40) = 1,600
Carrying Cost of Inventory (15 Days /30 Days *800kg *4) 1600
Total 16, 03,200

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ACCOUNTING CHAPTER 02

Q.14 M/s. X Private Limited is manufacturing a special product which requires a component
"SKY BLUE". The following particulars are available for the year ended 31 st March, 2018:

Annual demand of "SKY BLUE" 12000 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 purchases of "SKY BLUE"
provided the order size is 3000 components at a time.
You are required to:
Compute the Economic Order Quantity.
Advise whether the quantity discount offer can be accepted. [CA Inter May 2018, 5 Marks]

Answer:
(i) Calculation of Economic Order Quantity

EOQ = =

= 600 units

(ii) Evaluation of Profitability of Different Options of Order Quantity

When EAQ is ordered
Particulars (Amount Rs)
Purchase Cost (12,000 units  640) 76,80,000
Ordering Cost [A/Q*O] 36,000
(12,000 units/ 600 units)  1,800]

Carrying Cost [Q/2*C*i] 36,000

(600 units  ` 640  ½  18.75/100)

Total Cost 77,52,000

When Quantity Discount is accepted
Particulars (AmountRs)
Purchase Cost (12,000 units X` 608) 72,96,000
Ordering Cost [A/Q*O]] (12,000 units/3,000 units) X ` 1,800] 7,200

Carrying [Q/2*C*i] (3,000 units X 608 X ½ X18.75/100)] 1,71,000

Total Cost 74,74,200

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ACCOUNTING CHAPTER 02

Q.15 PQR Limited produces a product which has a monthly demand of 52,000 units. The product
requires a component X which is purchased at Rs. 15 per unit. For every finished product, 2
units of Component X are required. The Ordering cost is Rs. 350 per order and the Carrying cost
is 12% p.a.
Required:
(i) Calculate the economic order quantity for Component X.
(ii) If the minimum lot size to be supplied is 52,000 units, what is the extra cost, the
company has to incur?
(iii) What is the minimum carrying cost, the Company has to incur?
[CA Inter May 2006, 8Marks]
Answer: (i) EOQ =
Ci

= 15,578 units of components.

Total cost (when order size is 52,000 units) = Total ordering cost + Total carrying
cost
= (A/Q x O) + (Q/2 x C x i)
= [(52,000 x12/ 52,000) x 350] + (52,000/2 x 15 x 12%)
= 4,200 + 46,800
= 51,000

= [(52,000 x 12/ 15,578) x 350] + (15,578/2 x 15 x 12%)

= 14,020 +14,020
= 28,040

(v)
= Q/2 x C x i
= 15,578 /2 x 15 x 12%
= Rs. 14,020

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ACCOUNTING CHAPTER 02

Q.16 A company manufactures a product from a raw material, which is purchased at ` 80 per kg.
The company incurs a handling cost of ` 370 plus freight of ` 380 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 ` 12 per kg per annum.
The annual production of the product is 1,00,000 units and 2.5 units are obtained from one kg. of
raw material.
Required:
(i) Calculate the economic order quantity of raw materials.
(ii) Advise, how frequently company should order for procurement be placed.
(iii) 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?
Assume 360 days in a year. [CA Inter May 2014, 8 Marks]
Answer:

Annual requirement (usage) of raw material in kg. (A)

= 1, 00,000Units/ 2.5 units per kg
= 40,000 kg

Ordering Cost (Handling & freight cost) (O) = ` 370 + ` 380 = ` 750
Carrying cost per unit per annum (C) i.e. inventory carrying cost + working capital cost
= (`0.25 × 12 months) + ` 12
= `15 per kg.

E.O.Q. = = = 2,000 kg.

`15

(ii) Frequency of placing orders for procurement:

Annual consumption (A) = 40,000 kg.

Quantity per order (E.O.Q) = 2,000 kg.

No. of orders per annum (A/ E.O.Q) = 40,000kg. / 2,000kg = 20 orders

Frequency of placing orders (in days) = 360 days

20 orders
= 18 days

(iii) Percentage of discount in the price of raw materials to be negotiated:

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Particulars On Quarterly On E.O.Q Basis

Basis
1. Annual Usage (in Kg.) 40,000 kg. 40,000 kg.
2. Size of the order 10,000 kg. 2,000 kg.
3. No. of orders (1 ÷ 2) 4 20
4. Cost of placing orders or ` 3,000 ` 15,000
Ordering cost (4 order × ` 750) (20 orders × `
(No. of orders × Cost per order) 750)
5. Inventory carrying cost ` 75,000 ` 15,000
(Average inventory × Carrying (10,000 kg. × ½ × (2,000 kg. × ½ ×
cost per unit) 15) `15)
6. Total Cost (4 + 5) ` 78,000 ` 30,000

When order is placed on quarterly basis the ordering cost

and carrying cost increased by 48,000 (`78,000 - `30,000).
So, discount required = ` 48,000

Total annual purchase = 40,000 kg. × ` 80 = 32, 00,000

So, Percentage of discount to be negotiated

= 48,000/32,00,000 x 100

= 1.5%

Q.17 The annual carrying cost of material ‘X’ is Rs. 3.6 per unit and its total carrying cost is Rs.
9,000 per annum. What would be the Economic order quantity for material ‘X’, if there is no
safety stock of material X? [CA Inter Nov 2008, 2 Marks]
Answer:

Average Inventory = Total Carrying Cost

Carrying Cost per unit

= Rs. 9000
Rs. 3.6
= 2500 Units
Economic Order Quantity = Average Inventory x 2
= 2,500 x 2 = 5,000 units.

Q.18 KL Limited produces product 'M' which has a quarterly demand of 8,000 units. The product
requires 3 kgs quantity of material 'X' for every finished unit of product. The other information
are follows:
Cost of material 'X' : 20 per kg.
Cost of placing an order : ` 1000 per order
Carrying Cost : 15% per annum of average inventory

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You are required:

(i) Calculate the Economic Order Quantity for material 'X'.
(ii) Should the' company accept an offer of 2 percent discount by the supplier, if he wants to
supply the annual requirement of material 'X' in 4 equal quarterly instalments ?
[CA Inter Nov 2012, 5 Marks]
Answer:

= 8000 units (per quarter) x 4 (No. of Quarter in a year) x 3

kgs (for every finished product)

= 96,000 kgs.

= 8,000 kg

Particulars When EOQ is ordered When discount of 2% isaccepted and supply

is in 4 equal installments
Order size 8000 kgs 96,000 kgs /4 = 24, 000 kgs

No. of order 96,000kgs/8000kgs = 12 96000 kgs / 24000 = 4

Purchase Cost per 20 (20-2%) = 19.60

kg.
Total Purchase (96,000 kgs x 20) =19,20,000 (96,000 kgs x 19.60) =18,81,600
Cost (A)
Ordering Cost (B) (1000 x 12 ) = 120000 (1000 x 4) = 4000

Carrying Cost (C) (8000 units x ½ x 20 x 15%) = (24,000 units x ½ x 19.6 x 15%) = 35,280
12,000
Total cost 19,44,000 19,20,880

Advice – The total Cost is lower if Company accept an offer of 2 percent discount by the supplier,
when supply of the annual requirement of material ‘X’ is made in 4 equal instalments.

Q.19 ABC Limited has received an offer of quantity discounts on its order of materials as under:

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Price per tonnee Tonnes

Nos.

4,800 Less than 50

4,680 50 and less than 100

4,560 100 and less than 200

4,440 200 and less than 300

4,320 300 and above

The annual requirement for the material is 500 tonnes. The ordering cost per order is `
6,250 and the stock holding cost is estimated at 25% of the material cost per annum.
Required:
(i) Compute the most economical purchase level.
(ii) Compute E.O.Q. if there are no quantity discounts and the price per tone is ` 5,250.
[CA Inter Nov 2010,5 Marks]
Answer:
Calculation of most economical purchase level:
A= Annual requirement = 500 tonnes

Order No. of Orders Cost of Purchase Ordering Cost Carrying Cost Total Cost
size (A/Q) (A x Cost/total) (A/Q x Rs. 6,250) (Q/2 x Price/ tonne × 25%) Rs.
(Q)
Units
40 500/40= 12.5 500×4,800 12.5X6,250 40 25,02,125
 4,800.25  24,000
= 24,00,000 = 78,125
2
50 500/50= 10 500 X 4,680 10X6,250 50 24,31,750
 4,680.25  29,250
= 23,40,000 = 62,500
2
100 500/100= 5 500 X 4,560 5X62,250 100 23,68,250
 4,560.25  57,000
= 22,80,000 = 31,250
2
200 500/200= 2.5 500× 4,440= 2.5× 200 23,46,625
22,20,000 6,250=15,625  4,440.25 1,11,000
2
300 500/300=1.67 500 X 4,320 1.67 X 6,250 300 23,32,437.50
 4,320.25  1,62,000
= 21,60,000 = 10,437.50
2

The total cost of purchase, ordering cost and carrying cost of 500 tonnes is minimum Rs.
23,32,437.50 when the order size is 300 tonnes. Hence most economical purchase level is 300
tonnes.

Q.20 M/s. SJ Private Limited manufactures 20000 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,

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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 [CA Inter Nov 2018, 5 Marks]
Answer:

Annual consumption 250 kg × 52 weeks = 13,000 kg

EOQ =

Ci

A = Annual Consumption = 13,000 kg

O = Ordering Cost = `. 1,500
C = Cost per kg = `. 100
i = carrying cost rate = 9.75%
Carrying cost per kg per annum (c× i) = 100 × 9.75% = `. 9.75

= = 2000 kg.

(iv) )
6 × 250) kg
= 600 kg.

= ½(3100 + 600) = 600 + ½ x 2000 kg

= 1850 kg = 1600 kg

Q.20 Supreme Limited is a manufacturer of energy saving bulbs. To manufacture the finished
product one unit of component ‘LED’ is required. Annual requirement of component ‘LED’ is
72,000 units, the cost being ` 300 per unit. Other relevant details for the year 2015- 2016 are:

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Cost of placing an order : ` 2,250

Carryingcostof inventory : 12%per annum
Lead time-
Maximum : 20 days
Minimum : 8 days
Average : 14 days
Emergency purchase : 5 days
Consumption-
Maximum : 400 units per
day
Minimum : 200 units per
day
Average : 300 units per
day
You are required to calculate:
(i) Re-order quantity
(ii) Re-ordering level
(iii) Minimum stock level
(iv) Maximum stock level
(vi) Danger level [CA Inter Nov 2016, 5 Marks]
Answer:

(i) Re- order Quantity (ROQ)

Annual Consumption of raw material (A) = 72,000 units Cost of
placing an order (O) = ` 2,250

Carrying cost per unit per annum (c × i) = ` 300 × 12% = ` 36

Economic Order Quantity (EOQ)/ROQ =

= 3000 units
(ii) Re-order level (ROL) = Maximum consumption × Maximum lead time
= 400 units × 20 days = 8,000 units
(iii) Minimum Level = ROL – (Average consumption × Average lead time)
= 8,000 units – (300 unit’s × 14 days)
= 3,800 units

(iv) Maximum Level = ROL + ROQ – (Minimum consumption × Minimum lead time)
= 8,000 units + 3,000 units – (200 unit’s × 8 days)

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= 9,400 units
(v) Danger level = Average Consumption × Emergency Delivery Time
= 300 units × 5 days = 1,500 units

Or,
= Minimum consumption × Emergency Delivery Time
= 200 units × 5 days= 1,000 units.

Q.21 A Ltd. produces a product ‘X’ using a raw material ‘D’. To produce one unit of X, 4 kg of D
is required. As per the sales forecast conducted by the company, it will be able to sale 20,000
units of X in the coming year.
The following are the information related to the raw material D:
(i) The Re-order quantity is 400 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 40 kg. more than the average consumption per day.
(iii) There is an opening stock of 2,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is ` 250 per kg.
(vi) There is an opening stock of 1,800 units of the finished product X. The carrying cost of
inventory is 14% p.a.
To place an order company has to incur ` 1,340 on paper and documentation work. From the
above information FIND OUT the followings in relation to raw material D:
(i) Re-order Quantity
(ii) Maximum Stock level
(iii) Minimum Stock level
Calculate the impact on the profitability of the company by not ordering the EOQ.
[Take 300 days for a year]
[CA Inter RTP May 2021]
Answer:
(i) Computation of Annual consumption & Annual Demand for raw material ‘D’:

Sales forecast of the product ‘X’ 20,000 units

Less: Opening stock of ‘X’ 1,800 units
Fresh units of ‘X’ to be produced 18,200 units
Raw material required to produce 18,200 units of ‘X’ 72,800 kg.
(18,200 units × 4 kg.)
Less: Opening Stock of ‘D’ 2,000 kg.
Annual demand for raw material ‘D’ 70,800 kg.

(ii) Computation of Economic Order Quantity (EOQ):

EOQ = 2x Annualdemandof 'D' x ordering cost

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=
250 x 14%

= 2,328 kg

(iii) Re- Order level:

= (Maximum consumption per day × Maximum lead time)
= {(Annual consumption of D/360 +40 Kg) x 8 days}
= (70,800 kg / 300 days + 40 kg) x 8 days
= 2,208 Kg
(iv) Minimum consumption per day of raw material ‘D’:
Average Consumption per day = 236 Kg.
Hence, Maximum Consumption per day = 236 kg. + 40 kg. = 276 kg.

So Minimum consumption per day will be

Min .consumption+ Max. Consumption
Average Consumption =
2
Min. consumption + 276 kg.
Or, 236 kg. =
2
Or, Min. consumption = 472 kg – 276 kg. = 196 kg.
(v) Re-order Quantity :
= EOQ – 400 kg. = 2,328 kg. – 400 kg. = 1,928 kg.
(vi) Maximum Stock level:
= Re-order level + Re-order Quantity – (Min. consumption per day × Min. lead time)
= 2,208 kg. + 1,928 kg. – (196 kg. × 4 days) = 4,136 kg. – 784 kg.
= 3,352 kg.
(vii) Minimum Stock level:
= Re-order level – (Average consumption per day × Average lead time)
= 2,208 kg. – (236 kg. × 6 days)
= 792 kg.
(viii) Impact on the profitability of the company by not ordering the EOQ.

When purchasing the ROQ When purchasing the EOQ

I Order quantity 1,928 kg. 2,328 kg.
II No. of orders a 70,800 kg / 1,928 kg 70,800 kg / 2,328 kg
year = 36.72 or 37 orders = 30.41 or 31 orders

III Ordering Cost 37 orders x 1,340 = 49,580 31 orders x 1,340 = 41,540

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III Average 1,928kg. /2 -= 964kg 2,328kg. / 2 = 1,164kg.

Inventory
III Carrying Cost
964 kg. × ` 35 = ` 33,740 1,164 kg. × ` 35 = ` 40,740

VI Total Cost ` 83,320 `82,280

Extra Cost incurred due to not ordering EOQ = `83,320 - `82,280 = `1,040

Q.22 A company uses four raw materials A, B, C and D for a particular product for which the
following data apply :–
Raw Usage Re-order Price Delivery period Re- Minimum
Material per unit Quantity per Kg. (in weeks) order level
of (Kg.) (`) Minimum Average Maximum level (Kg.)
product (Kg.)
(Kg.)
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?
Minimum Stock level of D? [CA Inter RTP NOV 2020]
Answer:
(i) Minimum stock of A
= Re-order level – (Average consumption × Average time required to obtain delivery)
= 60,000 kg. – (900units × 12 kg. × 3 weeks)
= 27,600 kg.
(ii) Maximum stock of B
Re-order level + Re-order quantity– (Min. Consumption × Min. Re-order period)
= 70,000 kg + 8000 kg – (550 units x 8 kg x 5 weeks)
= 78,000 – 22, 000
= 56, 000 kg
(iii) Re-order level of C
Maximum re-order period × Maximum Usage
= 7 weeks × (1,250units × 6 kg.) = 52,500 kg.
OR

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= Minimum stock of C+ (Average consumption × Average delivery time)

= 25,500 kg. + [(900 units ×6 kg.)×5 weeks] =52,500 kg.
(iv) Average stock level of A
Minimum stock + Maximum stock / 2 (refer Working note)
= 27,600 + 58,800 / 2
= 43,200 kg
Working note
Maximum stock of A = ROL + ROQ – (Minimum consumption × Minimum re-order period)
= 60,000 kg. + 12,000 kg. – [(550units × 12 kg.) × 2 weeks] = 58,800 kg.
(v) Re-order level of D
Maximum re-order period × Maximum Usage
= 3 weeks × (1,250 unit’s × 5 kg.)
= 18,750 kg
(vi) Minimum stock of D
Re-order level – (Average consumption × Average time required to obtain delivery)
= 18,750 kg. – (900units × 5 kg. × 2 weeks)
= 9,750 kg

Q.23 following details are related to a manufacturing concern:

Re-order Level 1,60,000 units
Economic Order Quantity 90,000 units
Minimum Stock Level 1,00,000 units
Maximum Stock Level 1,90,000 units
Average Lead Time 6 days
Difference between minimum lead time and Maximum lead time 4 days

Calculate:
(i) Maximum consumption per day
(ii) Minimum consumption per day [CA Inter NOV 2014, 5 Marks]

Answer:
(i) Difference between Minimum lead time Maximum lead time = 4 days Max.
lead time – Min. lead time = 4 days
Or, Max. lead time = Min. lead time + 4 days………………….. (i)
Average lead time is given as 6 days i.e.

Max .lead-time + Min .lead-time = 6 days……….. (ii)

2
Putting the value of i and ii

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Min. lead time + 4 days + Min .lead time

2 = 6 days

Or, Min. lead time + 4 days + Min. lead time = 12 days

Or, 2 Min. lead time= 8 days
Or, Minimum lead time =8 days / 2 = 4 days
Putting this Minimum lead time value in (i),
we get Maximum lead time = 4 days + 4 days = 8 days
(ii) Maximum consumption per day:
Re-order level = Max. Re-order period × Maximum Consumption per day
1,60,000 units = 8 days × Maximum Consumption per day
Or, Maximum Consumption per day = 1,60,0000 / 8 days
= 20,000 units
(iii) Minimum Consumption per day:
Re-order level + Re-order Quantity – (Min. lead time × Min. Consumption per day)
Or, 1, 90,000 units = 1, 60,000 units + 90,000 units – (4 days × Min. Consumption per day)
Or 4 days x Min. consumption per day = 2, 50,000 units – 1, 90,000 units
Or Minimum consumption per day = 60,000 / 4 days = 15,000 units

Q.24 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?
[CA Inter NOV 2020, 10 Marks]
Answer:
Working Notes:
Annual requirement (A) = 27,000 units
Cost per order (O) = ` 240
Inventory carrying cost (i) = 12.5%
Cost per unit of spare (c) = ` 50
Carrying cost per unit ( i x c) = 50 x 12.5 % = 6.25

Computation of Economic Order Quantity (EOQ):

2x Annual demand of 'D' x ordering
EOQ =
cost

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2x 27,000 x 240
=
6.25

= 1440 units
Calculation of saving by opting EOQ
Existing Order policy EOQ Model
No. of orders (27,000 / 3000) (27,000 / 1440)
=9 = 18.75 or 19

A. Ordering Cost 2,160 4500

( 240 × 9) (27000 /1440 x 240)

B. Carrying cost 9,375 4,500

(3000 units x ½ x 50 x (1440 units x ½ x 50 x
12.50 %) 12.5 %)

Total cost (A+B) (`) 11,535 9,000

Saving of Cost by opting EOQ Model = ` 11,535 – ` 9,000 = ` 2,535
Re-order point under EOQ:
Re-order point/ Re-order level = Maximum consumption × Maximum lead time
27,000units
Consumption per day =
360 Days

= 75 Units

Re-order point/ Re-order level = 75 units × 12 days = 900 units

Frequency of orders (in days) = 360 days / no of orders in year
= 360/ 19
= 18.95 / 19 days

Q.25 Primex Limited produces product 'P'. It uses annually 60,000 units of a material 'Rex'
costing ` 10 per unit. Other relevant information are:
Cost of placing an order :` 800 per order
Carrying cost : 15% per annum of average inventory
Re-order period : 10 days
Safety stock : 600 units The Company operates 300 days in a year.
You are required to calculate:
Economic Order Quantity for material 'Rex'.
(i) Re-order Level
(ii) Maximum Stock Level
(iii) Average Stock Level [CA Inter NOV 2013, 5 Marks]

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Answer:

(i) Economic Order Quantity (E.O.Q)

= =

= 8000 Units 

(ii) Re-order Level = Safety Stock + (Normal daily Usage × Re-order period)
= 600 + (60,000 units / 300 days x 10 days)
= 2600 units
(iii) Maximum Stock Level = E.O.Q (Re-order Quantity) + Safety Stock
= 8000 units + 600 units
= 8,600 units
(iv) Average Stock level = Minimum stock level + ½ reorder level
= 600 + ½ 8000 units
= 4600 Units
OR
Average Stock Level = Max stock level + Minimum stock level / 2
= 8600 units + 600 units / 2
= 4,600 units
Minimum Stock level = Re order level – (Normal daily usage x re order period)
= 2600 – (60,000 units / 300 days x 10 days)
= 2600 – 2000
= 600 units

Q.26 ZED Company supplies plastic crockery to fast food restaurants in metropolitan city. One
of its products is a special bowl, disposable after initial use, for serving soups to its customers.
Bowls are sold in pack 10 pieces at a price of Rs. 50 per pack The demand for plastic bowl has
been forecasted at a fairly steady rate of 40,000 packs every year. The company purchases the
bowl direct from manufacturer at Rs. 40 per pack within a three days lead time. The ordering and
related cost is Rs. 8 per order. The storage cost is 10% per cent per annum of average inventory
investment.
(i) Calculate Economic Order Quantity.
(ii) Calculate number of orders needed every year.
(iii) Calculate the total cost of ordering and storage bowls for the year.
(iv) Determine when the next order to be placed should. (Assuming that the company does

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maintain a safety stock and that the present inventory level is 333 packs with a
Year of 360 working days [ CA Inter May 2008 ,8 marks]
Answer:

(i) Economic Order Quantity (i) (ii) (iii) (iv) (v)

EOQ 






= 400 Packs

(ii) Number of orders per year

= Annual requirements / EOQ
= 40,000 / 400
= 100 order per year
(iii) Ordering and storage costs

Ordering costs :– 100 orders x Rs. 8.00 800

Storage cost :– (400/2) x (10% of 40) 800
Total cost of ordering & storage 1600

(iv) Timing of next order

a) Day’s requirement served by each order =
Number of days requirements = No of working days / No of order in the year
= 360 / 100
= 3.6 days’ supply
This implies that each order of 400 packs supplies for requirements of 3.6 days only.
b) Days requirement covered by inventory
= units in inventory / Economic order quantity x Day requirement served by an order
= 333 / 400 x 3.6 days
= 3 days
c) Time interval for placing next order
Inventory left for day’s requirement – Lead time of delivery 3 day’s requirements – 3 days lead time = 0
This means that next order for the replenishment of supplies has to be placed immediately.

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Q.27 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).
[CA Inter May 2018, 5 Marks]
Answer:
Material M Material N
1. Turnover ratio 1. Turnover ratio
Cost of stock of raw material consumed Cost of stock of raw material consumed
= =
Average stock of raw material Average stock of raw material

= `6,00,000 + `9,50,000 -`4,50,000 =2.09 = `10, 00,000 + `18, 40,000 -`7, 25,000.
(6,00,000 + 4,50,000) / 2 (10,00,000 + 7,25,000) / 2
2. Average number of days for which =2.45
theaverage inventory is held 2. Average number of days for which
360 theaverage inventory is held
=
Inventory turnover ratio 360
=
360 days Inventory turnover ratio
=
2.09 360 days
=
= 172.25 days 2.45
= 146.94 days

(i) Comparatively Material M is slower than Material N since Inventory holding period of‘M’
is 172.25 days in Comparison to ‘N’ i.e. 146.94 days. Infact, both materials have slow
inventory turnover. Though, different business has their own expected rates for inventory
turnover like food shops have fast inventory turnover, shop selling furniture etc. will
have slower inventory turnover while manufacturers of large items of plant will have
very long inventory turnover.
(ii) If it is not as per the Industry Standard, then a slow turnover may indicate that
excessive inventory is held and risk of obsolete or spoiled inventory will increase. Large
quantity of slow moving material means that capital is locked up in business and not
earning revenue. It is advisable to make proper investigations into slow moving
materials and take steps to minimize the loss arises therefrom as it may impact overall
financial health of the organization.

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Q.28 Prepare a Store Ledger Account from the following transactions of XY Company Ltd. April,
2011
1 Opening balance 200 units @ ` 10 per unit.
5 Receipt 250 units costing ` 2,000
8 Receipt 150 units costing ` 1,275
10 Issue 100 units
15 Receipt 50 units costing ` 500
20 Shortage 10 units
21 Receipt 60 units costing ` 540
22 Issue 400 units
The issues up to 10-4-11 will be priced at LIFO and from 11-4-11 issues will be priced at FIFO.
Shortage will be charged as overhead. [CA Inter May 2011, 5 Marks]
Answer:

Store Ledger Account

Name :- Max. Stock Level - Bin No.-
Code No. :- Min. Stock Level - Location Code-
Description:- Re-order level –
Re-order quantity-
Date Receipts Issues Balance
Qty. Rate Amount Qty. Rate Amount Qty. Rate Amount
Units Units
` ` ` ` ` `
April 1 200 10 2,000
” 5 250 8 2,000 200 10 4,000
250 8
” 8 150 8.50 1,275 200 10 5,275
250 8
150 8.50

” 10 100 8.50 8.50 200 10 4,425

250 8
50 8.50
” 15 50 10 500 200 10 4,925
250 8
50 8.50
50 10
” 20 10 10 100 190 10 4,825
(shortage)
250 8
50 8.50
50 10
” 21 60 9 540 190 10 5,365
250 8
50 8.50
50 10
60 9
” 22 190 10 40 8
3,580 1,785
210 8 50 8.50

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50 10 (Closing
60 9 Stock)

Q.29 The following are the details of receipt and issue of material 'CXE' in a manufacturing Co.
during the month of April 2019:
Date Particulars Quanti Rate
ty per
(kg) kg
Apri4 Purchase 3,000 ` 16
Apri8 Issue 1,000
Apri15 Purchase 1,500 ` 18
April20 Issue 1,200
April Return to supplier out of purchase made on 300
25 April 15
April26 Issue 1,000
April28 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 [CA Inter May 2019, 10 Marks]
Answer:
a) Stores Ledger Account for the month of April, 2019 (Weighted AverageMethod)
Receipt Issue Balance
Date Qty Rate Amount Qty Rate Amount Qty Rate Amount
Units (`) (`) Units (`) (`) Units (`) (`)
1-4-19 _ _ _ _ _ _ 1,000 15.00 15,000
4-4-19 3,000 16.00 48,000 _ _ _ 4,000 15.75 63,000
8-4-19 _ _ _ 1,000 15.75 15,750 3,000 15.75 47,250
15-4-19 1,500 18.00 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 18.00 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 17.00 8,500 _ _ _ 2,500 16.48 41,200
30-4-19 _ _ _ 50 16.48 824 2,450 16.48 40,376
b)
c) Stores Ledger Account for the month of April, 2019 (LIFO)
Receipt Issue Balance
Date Qty Rate Amount Qty Rate Amount Qty Rate Amount
Units (`) (`) Units (`) (`) Units (`) (`)
1-4-19 _ _ _ _ _ _ 1,000 15 15,000

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4-4-19 3,000 16 48,000 _ _ _ 1,000 15 15,000

3,000 16 48,000
8-4-19 _ _ _ 1,000 16 16,000 1,000 15 15,000
2,000 16 32,000
15-4-19 1,500 18 27,000 _ _ _ 1,000 15 15,000
2,000 16 32,000
1,500 18 27,000
20-4-19 _ _ _ 1,200 18 21,600 1,000 15 15,000
2,000 16 32,000
300 18 5,400
25-4-19 _ _ _ 300 18 5,400 1,000 15 15,000
2,000 16 32,000
26-4-19 _ _ _ 1,000 16 16,000 1,000 15 15,000
1,000 16 16,000
28-4-19 500 17 8,500 _ _ _ 1,000 15 15,000
1,000 16 16,000
500 17 8,500
30-4-19 _ _ _ 50 17 850 1,000 15 15,000
1,000 16 16,000
450 17 7,650

d) 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
98,500 98,500
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

Q.30 Arnav Electronics manufactures electronic home appliances. It follows weighted average
Cost method for inventory valuation. Following are the data of component X:

Date Particulars Units Rate per

unit (`)
15-12-19 Purchase Order- 008 10,00 9,930
0
30-12-19 Purchase Order- 009 10,00 9,780
0
01-01-20 Opening stock 3,500 9,810
05-01-20 GRN*-008 (against the Purchase Order- 10,00 -
008) 0
05-01-20 MRN**-003 (against the Purchase Order- 500 -

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008)
06-01-20 Material Requisition-011 3,000 -
07-01-20 Purchase Order- 010 10,00 9,750
0
10-01-20 Material Requisition-012 4,500 -
12-01-20 GRN-009 (against the Purchase Order- 10,00 -
009) 0
12-01-20 MRN-004 (against the Purchase Order- 400 -
009)
15-01-20 Material Requisition-013 2,200 -
24-01-20 Material Requisition-014 1,500 -
25-01-20 GRN-010 (against the Purchase Order- 10,00 -
010) 0
28-01-20 Material Requisition-015 4,000 -
31-01-20 Material Requisition-016 3,200 -

*GRN- Goods Received Note; **MRN- Material Returned Note

Based on the above data, you are required to calculate:
(i) Re-order level
(ii) Maximum stock level
(iii) Minimum stock level
(iv) Value of components used during the month of January, 2020.
(v) Inventory turnover ratio.
(vi) PREPARE Store Ledger for the period January 2020 and DETERMINE the value of stock
as on 31-01-2020.
[CA Inter May 2020, 10 Marks]
Answer:
Workings:
(i) Consumption is calculated on the basis of material requisitions:
Maximum component usage = 4,500 units (Material requisition on 10 -01-20)
Minimum component usage = 1,500 units (Material requisition on 24-01-20)
(ii) Lead time is calculated from purchase order date to material received date
Maximum lead time = 21 days (15-12-2019 to 05-01-2020)
Minimum lead time = 14 days (30-12-2019 to 12-01-2020)

Calculations:
(i) Re-order level
= Maximum usage × Maximum lead time
= 4,500 units × 21 days = 94,500 units
(ii) Maximum stock level
= Re-order level + Re-order Quantity – (Min. Usage × Min. lead time)
= 94,500 units + 10,000 units – (1,500 units × 14 days)

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= 1,04,500 units – 21,000 units = 83,500 units

(iii) Minimum stock level
= Re-order level – (Avg. consumption × Avg. lead time)
= 94,500 units – (3,000 units × 17.5 days)
= 94,500 units – 52,500 units
= 42,000 units
(iv) Value of components used during the month of January 2020:
= Sum of material requisitions 011 to 016 (‘000)
= ` 29,694 + ` 44,541 + ` 21,611 + ` 14,734 + ` 39,156 + ` 31,325
= ` 1,81,061
(v) Inventory Turnover Ratio
= Value of material issued / Average stock value
= (1,81,061 / 1,39,001 +34,335 /2 )
= 2.09

Store Ledger for the month of January 2020:

Date Receipts Issue Balance
GRN/ Units Rate Amt. MRN/ Units Rate Amt. Units Rate Amt.
MRN ` (` ‘000) MR ` (` ‘000) ` (` ‘000)
01-01-20 - - - - - - - - 3,500 9,810 34,335
05-01-20 008 10,000 9,930 99,300 003 500 9,930 4,965 13,000 9,898 1,28,670
06-01-20 - - - - 011 3,000 9,898 29,694 10,000 9,898 98,980
10-01-20 - - - - 012 4,500 9,898 44,541 5,500 9,898 54,439
12-01-20 009 10,000 9,780 97,800 004 400 9,780 3,912 15,100 9,823 1,48,327
15-01-20 - - - - 013 2,200 9,823 21,611 12,900 9,823 1,26,716
24-01-20 - - - - 014 1,500 9,823 14,734 11,400 9,823 1,11,982

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