Chapter – 2 Material Costing

Chapter Flow

Material Procurement Valuation of Materials Received

- Bill of Materials
- Material Requisition Note
- Purchase Requisition
- Goods Received Note Material Storage & Records:
- Material Returned Note etc. - Bin Cards
- Stores Ledger
Inventory Control: - Stock Control Cards etc.
- Setting of various stock levels
- Economic Order Quantity (EOQ) Valuation of Material Issues:
- Techniques of Inventory Control etc. - Cost Price methods (FIFO, LIFO etc.)
- Average Price methods
Accounting & Control of: - Market Price methods
- Waste, Scrap, Spoilage, Defectives etc. - Notional Price methods

Consumption of Materials

PANORAMIC EDUCATION 27
Meaning: Material is all commodities/ physical objects used to make the final product.
Direct Materials constitute a significant part for manufacturing and production of goods hence it requires adequate
management attention. Cost control starts from here, and for this purpose it is necessary that the principle of 3Es
(Economy, Efficiency and Effectiveness) i.e. economy in procurement, efficiency in handling and processing the
material and effectiveness in producing desired output as per the standard, is also applied for this cost element.
Importance of proper recording and control of material
Minimising interruption in Material Control system ensures that no activity, particularly production,
production process suffers from interruption for want of materials and stores. It should be noted
that this requires constant availability of every item that may be needed in
production process, howsoever, small its cost may be.
Optimisation of Material Cost: The overall material costs includes price, ordering costs and holding costs.
Since all the materials and stores are acquired at the lowest possible price
considering the required quality and other relevant factors like reliability in
respect of delivery, etc., holding cost too needs to be minimized.
Reduction in Wastages: Material Control System has an objective of avoidance of unnecessary losses
and wastages that may arise from deterioration in quality due to defective or
long storage or from obsolescence. It may be noted that losses and wastages
in the process of manufacture are a concern of the production department.
Adequate Information: The system of material control maintains proper records to ensure that
reliable information is available for all items of materials and stores. This
not only helps in detecting losses and pilferages but also facilitates proper
production planning.
Completion of order in time: Proper material management is very necessary for fulfilling orders of the firm.
This adds to the goodwill of the firm.

Type of Material

Direct (Part of Prime Cost) Indirect (Part of Overheads)

Which can be directly attributable to the end which are not directly attributable to a particular
product final product.

Material control is a systematic control over the procurement, storage and usage of material so as to maintain an
even flow of material.

Elements of Material Control

Material Procurement
Material Storage Control Material Usage Control
Control

PANORAMIC EDUCATION 28
Materials Procurement Procedure

1. Bill of Materials
Engineering/Planning
Department

Production Department/
Workshop

2. Material Requisition

3. Purchase Requisition

Store Purchase Department

10. Goods delivery with

Challan or/and Invoice
13. Material Abstract

12. Material Returned Note

11. Goods Received Note

5. Quotation

6. Purchase Order
4. Tender or Request for Proposal
12. Material Returned
Note

Cost/Accounting 7. Performa Invoice Suppliers (s)

Department 8. Payment etc.
9. Invoice

Diagram: Material Procurement Procedure

1. Bill of material: It is also known as Materials Specification List or Materials List. It is a detailed list specifying
the standard quantities and qualities of materials and components required for producing a product or
carrying out of any job. The materials specification list is prepared by the product development team commonly
known as engineering or planning department in a standard form.
2. Material requisition note: It is also known as material requisition slip. It is a voucher of authority used to get
materials issued from store. Generally, it is prepared by the production department and materials are
withdrawn on the basis of material requisition list or bill of materials.
3. Purchase Requisition: This document authorises the purchase department to order for the materials specified
in the note. Since the materials purchased will be used by the production departments, there should be constant
co-ordination between the purchase and production departments. A purchase requisition is a form used for
making a formal request to the purchasing department to purchase materials. This form is usually filled up by
the store keeper for regular materials and by the departmental head for special materials (not stocked as regular
items).

PANORAMIC EDUCATION 29
 On the basis of standing order, once an item is included in the standard list, it becomes the duty of the purchase
department to arrange for fresh supplies before existing stocks are exhausted. Any change in the consumption
pattern should be informed to the purchase department for necessary action from their end.
4. Inviting Quotation/ Request for Proposal (RFP)/ Notification Inviting Tender (NIT):
Materials purchase department has to answer the following question before initiating purchasing of materials:
(i) What to purchase?
(ii) When to purchase?
(iii) How much to purchase?
(iv) From where to purchase?
(v) At what price to purchase?
Government e Marketplace (GeM): A dedicated e-market for different goods & services procured by
Government Organisations / Departments / PSUs. It aims to enhance transparency, efficiency and speed in
public procurement. It provides the tools of e-bidding, reverse e-auction and demand aggregation to facilitate
the government users, achieve the best value for their money. The purchases through GeM by Government
users have been authorised and made mandatory by Ministry of Finance.
5. Selection of Quotation/ Proposal: After invitation of tender from the vendors, interested vendors who are
fulfilling all the criteria mentioned in the tender notice send their price quotations/ proposals to the purchase
department. On the receipt of quotations, a comparative statement is prepared. For selecting material suppliers,
the factors which the purchase department keeps in its mind are-price, quantity, quality offered, time of
delivery, mode of transportation, terms of payment, reputation of supplier etc. In addition to the above listed
factors purchase manager obtains other necessary information for final selection of material suppliers.
6. Preparation and Execution of Purchase Orders: Having decided on the best quotation that should be accepted,
the purchase manager or concerned officer proceeds to issue the formal purchase order. It is a written request
to the supplier to supply specified materials at specified rates and within a specified period.
7. Receipt and Inspection of Materials: After execution of purchase order and advance payment (if terms of
quotation so specify), necessary arrangement is made to receive the delivery of materials After receipt of
materials along with relevant documents or/ and invoice, receiving department (store dept.) arrange to inspect
the materials for its conformity with purchase order. After satisfactory inspection, materials are received and
Goods Received Note is issued. If some materials are not found in good condition or are not in conformity with
the purchase order are returned back to the vendor along with a Material Returned Note.
8. Checking and Passing of Bills for Payment: The invoice received from the supplier is sent to the accounts section
to check authenticity and mathematical accuracy. The quantity and price are also checked with reference to
goods received note and the purchase order respectively. The accounts section after checking its accuracy finally
certifies and passes the invoice for payment.

Uses of Bill of Material

Marketing (Purchase) Dept. Production Dept. Stores Dept. Cost/ Accounting Dept.
Materials are procured Production is planned It is used as a reference It is used to estimate cost
(purchased) on the basis of according to the nature, document while issuing and profit. Any purchase,
specifications mentioned in volume of the materials materials to the issue and usage are
it. required to be used. requisitioning compared/verified
Accordingly, material department. against this document.
requisition lists are
prepared.

PANORAMIC EDUCATION 30
Difference between Bill of Materials and Material Requisition Note
1. It is the document prepared by the engineering or 1. It is prepared by the production or other consuming
planning dept. department.
2. It is a complete schedule of component parts and 2. It is a document asking Store-keeper to issue
raw materials required for a particular job or work materials to the consuming department.
order.
3. It often serves the purpose of a material requisition 3. It cannot replace a bill of materials.
as it shows the complete schedule of materials
required for a particular job i.e. it can replace material
requisition.
4. It can be used for the purpose of quotations. 4. It is useful in arriving historical cost only.
5. It helps in keeping a quantitative control on 5. It shows the material actually drawn from stores.
materials drawn through material requisition.

Valuation of material receipts

Ascertainment of cost of material purchased is called valuation of materials receipts.
Treatment of various items
Items Treatment
Discounts and Subsidy
(i) Trade Discount It is deducted from the purchase price.
(ii) Quantity It is deducted from the purchase price.
Discount
(iii) Cash Discount It is not deducted from the purchase price because it is treated as interest and
finance charges.
(iv) Subsidy/ Grant/ It is deducted from the cost of purchase.
Incentives
Duties and Taxes
(v) Road Tax/ Toll It is included with the cost of purchase, if paid by the buyer.
Tax
(vi) Integrated Goods It is excluded from the cost of purchase if credit for the same is available. It
And Service Tax should not form part of cost of purchase.
(IGST, SGST &
CGST)
(vii) Basic Custom It is added with the purchase cost.
Duty
Penalty and Charges
(viii) Demurrage It is an abnormal cost and not included with cost of purchase
(ix) Detention It is an abnormal cost and not included with cost of purchase
charges/ Fine
(x) Penalty Penalty of any type is not included with the cost of purchase
Other expenditures
(xi) Insurance charges It is added with the cost of purchase.
(xii) Commission or It is added with the cost of purchase.
brokerage paid.

PANORAMIC EDUCATION 31
 (xiii) Freight inwards It is added with the cost of purchase.
(xiv) Cost of Treatment of cost of containers are as follows:
containers • Non-returnable containers: It is added with the cost of purchase.
• Returnable Containers: It should not be considered in the cost of purchase.
• Amount Paid > Amount of Refund: Short fall is added with the cost of
purchase.
(xv) Shortage Shortage due to normal reasons:
Good units absorb the cost of shortage due to normal reasons.
Losses due to breaking of bulk, evaporation, or due to any unavoidable conditions
etc. are the reasons of normal loss.
Shortage due to abnormal reasons:
Losses due to abnormal reasons are debited to costing profit and loss account.
Shortage arises due to abnormal reasons such as material mishandling, pilferage,
or due to any avoidable reasons are not absorbed by the good units.

Material Storage and Records:

Duties of Store Keeper

(i) General control over store: keep control over all activities in Stores department; check the quantities as
mentioned in Goods received note and with the purchased materials forwarded by the receiving department
and to arrange for the storage in appropriate places.

(ii) Safe custody of materials: materials are stored in a safe condition and environment required to preserve the
quality of the materials.

(iii) Maintaining records: maintain proper record of quantity received, issued, balance in hand and transferred
to/ from other stores.

(iv) Initiate purchase requisition: initiate purchase requisitions for the replacement of stock of all regular stores
items whenever the stock level of any item of store approaches the re-order level fixed.

(v) Maintaining adequate level of stock: maintain adequate level of stock at all time; take all the necessary action
so that production could not be interrupted due to lack of stock. Further he/ she should take immediate action
for stoppage of further purchasing when the stock level approaches the maximum limit.

(vi) Issue of materials: issue materials only against the material requisition slip approved by the appropriate
authority. He/ she should also refer to bill of materials while issuing materials to requisitioning department.

(vii) Stock verification and reconciliation: verify the book balances with the actual physical stock at frequent
intervals by way of internal control and check the any irregular or abnormal issues, pilferage, etc.

PANORAMIC EDUCATION 32
 •It is a quantitative record of inventory which shows the quantity of
inventory available in a particular bin.
Bin Cards •Bin refers to a box/ container/ space where materials are kept.
•Card is placed with each of the bin (space) to record the details of
material like receipt, issue and return.

•It is also a quantitative record of inventory maintained by stores

department for every item of material.
Stock Control Cards •In other words, it is a record which shows the overall inventory
position in store.
•Recording includes receipt, issue, return, in hand and order given.

•A Stores Ledger is maintained to record of both quantity and cost of

materials received, issued and those in stock.
•It’s being a subsidiary ledger to the main cost ledger, it is maintained
Store Ledger
by the Cost/ Accounts Department.
•The source documents for posting the ledger are Goods received
notes, Materials requisition notes etc

Bin Cards Stores Ledger

It is maintained by the storekeeper in the store. It is maintained in cost accounting department.
It contains only quantitative details of material It contains information both in quantity and value.
received, issued and returned to stores.
Entries are made when transaction takes place. It is always posted after the transaction.
Each transaction is individually posted Transactions may be summarized and then posted.
Inter-department transfers do not appear in Bin Material transfers from one job to another job are
Card. recorded for costing purposes.

Cost price Method Average price Method

Specific price Method, First in First out (FIFO), Simple average price Method
Last in First out (LIFO), Base price Method Weighted average price Method

Valuation of material Issue

Notional price Method

Market price Method
Standard price Method
Replacement price Method
Inflated price Method
Realisable price Method
Re-use price Method

PANORAMIC EDUCATION 33
 Just–In-Time ध्यान रखें

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.
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.
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. 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 diagram:

Production Material
starts to Requirement is Order for raw Supplier sent
Demand for
process the sent to materials sent the material for
final product
demand for Purchase to supplier production
product department

Inventory Control

By Setting Quantitive On the basis of Relative

Using Ratio Analysis Physical Control
levels Classification

Inventory Control
“The function of ensuring that sufficient goods are retained in stock to meet alternative requirements
without carrying unnecessarily large stocks.” The main objective of inventory control is to maintain a ‘trade-off
between stock-out and over-stocking.’

Objectives
✓ 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.
✓ A trade-off between Stock-out and Over-stocking is required.

PANORAMIC EDUCATION 34
Inventory control- By setting Quantitative Levels

Re-order stock Level •Maximum Consumption ⨯ Maximum Re- order period

•Minimum Stock Level + (Average Rate of Consumption × Average
"When to order" Re- order period)

Re-order Quantity/EOQ 𝟐 𝐱 𝐀𝐧𝐧𝐮𝐚𝐥 𝐑𝐞𝐪𝐮𝐢𝐫𝐞𝐦𝐞𝐧𝐭 (𝐀) 𝐱 𝐂𝐨𝐬𝐭 𝐩𝐞𝐫 𝐨𝐫𝐝𝐞𝐫 (𝐎)

•
"How much to order" 𝐂𝐚𝐫𝐫𝐲𝐢𝐧𝐠 𝐂𝐨𝐬𝐭 𝐩𝐞𝐫 𝐮𝐧𝐢𝐭 𝐩𝐞𝐫 𝐚𝐧𝐧𝐮𝐦 (𝐂)

Maximum Stock Level

"Highest level of •Re-oder Level + Re - oder Quantity - (Minimum Consumption Rate
quantity which can be × Minimum Re - oder Period)
held in at any time"

Minimum Stock Level

•Re-order stock level – (Average Consumption Rate ⨯ Average Re-
"Atleast how much to order Period )
stock"

Average stock Level •[Maximum stock Level + Minimum stock Level] / 2 OR

"Stock normally kept" •Minimum Level + ½ Re- Order Quantity

Danger stock Level

•Average Consumption* ⨯ Lead time for emergency purchase
"Kept for emergency • *Some time minimum consumption is used.
requirement"

•Kept for contingency to be used in case of sudden order, such stock

Buffer stock
is known as buffer stock.

PANORAMIC EDUCATION 35
1. Re- order Quantity: Re- order Quantity is the quantity of materials for which purchase requisition is made by
the store department. While setting the quantity to be re-ordered, consideration is given to the maintenance
of minimum level of stock, re-order level, minimum delivery time and the most important the cost. Hence, the
quantity should be where, the total of carrying cost and ordering cost be at minimum. For this purpose, an
economic order quantity should be calculated.
Economic order Quantity (EOQ): The size of an order for which total of ordering and carrying cost are at
minimum.
Annual Total Cost
Cost
Holding
Costs

Ordering
Costs

EOQ Re-order Quantity

Ordering Cost: The costs which are associated with the purchase or order of materials. It includes cost to invite
quotations, documentation works like preparation of purchase orders, employee cost directly attributable to the
procurement of mater transportation and inspection cost etc.
Carrying Cost: The costs for holding/ carrying of inventories in store. It includes t cost of fund invested in
inventories, cost of storage, insurance cost, obsolescence etc.

The Economic Order Quantity (EOQ) is calculated as below:

Ordering cost = Carrying cost
A/Q*O = Q/2 *C
2AO/C = Q2
𝟐 𝐱 𝐀𝐧𝐧𝐮𝐚𝐥 𝐑𝐞𝐪𝐮𝐢𝐫𝐞𝐦𝐞𝐧𝐭 (𝐀) 𝐱 𝐂𝐨𝐬𝐭 𝐩𝐞𝐫 𝐨𝐫𝐝𝐞𝐫 (𝐎)
E.O.Q. = √
𝐂𝐚𝐫𝐫𝐲𝐢𝐧𝐠 𝐂𝐨𝐬𝐭 𝐩𝐞𝐫 𝐮𝐧𝐢𝐭 𝐩𝐞𝐫 𝐚𝐧𝐧𝐮𝐦 (𝐂)

Annual Requirement (A)- It represents demand for Raw material or Input for a year.
Cost per Order (O)- It represents cost of placing an order for purchase.
Carrying Cost (C) - It represents cost of carrying average inventory on annual basis.

Assumptions underlying E.O.Q.: The calculation of economic order of material to purchased is subject to the
following assumptions:
• Ordering cost per order and carrying cost per unit per annum are known they are fixed.
• Anticipated usage of material in units is known.
• Cost per unit of the material is constant and is known as well.
• The quantity of material ordered is received immediately i.e. the lead time is zero.

PANORAMIC EDUCATION 36
2. Inventory Stock Out:
Stock-out means the demand of an item that could not be fulfilled because of insufficient stock level.

3. Safety stock:
It is the level of stock of any item which is maintained in excess of lead time consumption. It is kept as
cushion against any unexpected demand for that item.

4. Just in Time (JIT) inventory management:

(i) Continuity in production: Minimum investment without danger of interruption of production due to material

(ii) Lower cost: The cost of placing orders, receiving goods and maintaining stocks is minimised specially if the
system is coupled with the determination of proper economic order quantities.

(iii) Less attention required: Management time is saved since attention need to be paid only to some of the items
rather than all the items.

(iv) Systematic working: much of the work connected with purchases can be systematized on a routine basis, to be
handled by subordinate staff.

Inventory Control- On the basis of Relative Classification

ABC Analysis Fast, Slow and Non Vital, Essential and High, Medium and Low
Moving (FSN) Desirable (VED) (HML)
On the basis of value of On the basis of frequency On the basis of On the basis of price of an
inventory of usage importance of inventory item of inventory
‘A’ Category: High Fast Moving: Vital- High Cost item:
prices or heavy placed nearer to store Its unavailability can More priority for control,
requirement- issue point, frequently interrupt the production Medium cost and Low cost
10% of the total items reviewed process or production item:
70% of inventory value Slow Moving: loss. self Re – order Lesser priority
‘B’ Category: Moderate Stored little far level. [Unlike ABC overall value is
20% of the total items Reviewed periodically Essential- not seen, individual price is
20% of the total Non Moving: Unavailability may cause given importance]
investment kept for disposal sub standardization and
repeated to management loss of efficiency
‘C’ Category: for provision of loss. Reviewed periodically
70% of the total items
10% of total inventory Desirable-
value unavailability does not
cause any production or
efficiency loss.
Advantages of ABC analysis: The advantages of ABC analysis are the following:

(i) Continuity in production: It ensures that, without there being any danger of interruption of production for
want of materials or stores, minimum investment will be made in inventories of stocks of materials or
stocks to be carried.

(ii) Lower cost: The cost of placing orders, receiving goods and maintaining stocks is minimised specially if the
system is coupled with the determination of proper economic order quantities.

PANORAMIC EDUCATION 37
(iii) Less attention required: Management time is saved since attention need to be paid only to some of the
items rather than all the items, as would be the case if the ABC system was not in operation.

(iv) Systematic working: With the introduction of the ABC system, much of the work connected with purchases
can be systematized on a routine basis, to be handled by subordinate staff.
Inventory Control- Using Ratio Analysis
Input- Output Ratio Inventory Turnover Ratio
It is the ratio of the quantity of Inventory Turnover Ratio:
input of material to production and Cost of materials consumed during the period
the standard material content of Cost of average heldstock duirng the period
the actual output. Average stock:
enables comparison of actual 1/2 (Opening stock + Closing stock)
consumption and standard
Average no. of days of Inventory holding:
consumption indicating favorable or
365 days /12months
adverse
Inventory TurnoverRatio
High inventory turnover ratio: Material is fast moving.
Low inventory turnover ratio: Over-investment and locking up of the
working capital in inventories.

Inventory control - using Physical Control

Two bin system: Establishment of system Perpetual inventory Continuous stock
Bin is divided in two of budgets: records: verification:
parts: Calculate or identify exact Comprises of: (i) Bin It is a system of continuous
(I) smaller part to stock quantity of various types Cards, and (ii) Stores stock-taking. The stock
the quantity equal to the of inventories and the Ledger. verification may be done by
minimum stock or even time when they would be Procedure: internal audit department
the re-ordering level required can be known by (a) Reconcile the quantity but are independent of the
studying carefully balances shown by Stores store and production staff.
(II) the other part to keep production plans and Ledger and Bin card. Stock verification is done at
the remaining quantity. production schedules. (b) Checking the physical appropriate interval of time
balances of a number of without prior notice. The
Issues are made from On basis of which items every day element of surprise is
other part, when issues inventories requirement systematically and by essential for effective
are to made from smaller budget can be prepared. rotation. control of the system.
part then fresh order is It discourages the (c) Explaining promptly
placed. unnecessary investment the causes of
in inventories. discrepancies, if any,
between physical
balances and the book
figures.
(d) Making corrective
entries wherever
required
(e) Removing the causes
of the discrepancies.

PANORAMIC EDUCATION 38
Advantage of Continuous stock taking over annual stock taking:
(i) Closure of normal functioning is not necessary.
(ii) Stock discrepancies are likely to be brought to the notice and corrected much earlier.
(iii) The system generally has a sobering influence on the stores staff because of the element of surprise present
therein.
(iv) The movement of stores items can be watched more closely by the stores auditor so that chances of
obsolescence buying are reduced.
(v) Final Accounts can be ready quickly. Interim accounts are possible quite conveniently.

Material Issue procedure:

(i) Issue against Material Requisition Note: It is the voucher of the authority as regards to the issue of materials
for use in the factory or in any of its departments. After receipt of MRN and on proper authorisation store
keeper issue materials and keeps one copy of the MRN to maintain the necessary records.

(ii) Transfer of Material: Surplus materials generated during a job or production may be unsuitable for store
transfer due to factors like bulk, weight, or brittleness. Instead of returning them to the store, an alternative is
to transfer them to another job if feasible. However, such transfers are generally considered irregular and
improper as they can hinder proper allocation and control of material costs for jobs or production units. Direct
transfers between jobs should only occur in specific circumstances, such as those mentioned above.

(iii) Return of Material: Sometimes, it is not possible before hand to make any precise estimate of the material
requirements or units of production. In either case, material may have to be issued from stores in bulk, often
in excess of the actual quantity required. Where such a condition exists, it is of the utmost importance from
the point of view of materials control that any surplus material left over on the completion of a job should be
promptly hand over to the storekeeper for safe and proper custody to avoid misappropriation. The surplus
material, when it is returned to the storeroom, should be accompanied by a document known as a Shop Credit
Note or alternatively as a Stores Debit Note.

Methods of
valuation of
Material issues

Cost price Average Price Market price Notional Price

method method method Method

Weighted
Specific price FIFO (First in LIFO (last in first Base Stock Simple Average Replacement Realisable price Standard Price Inflated Price Re-use price
Average Price
method first out) out) Method Price Method price method method method method method
Method

Cost Price Methods

(i) Specific Price Method: This method is useful, especially when materials are purchased for a specific job or
work order, as such materials are issued subsequently to that specific job or work order at the price at which
they were purchased. To use this method, it is necessary to store each lot of material separately and maintain
its separate account. Generally used in Solitaire Diamond Jewellery Pieces.
Advantages Disadvantages
• The cost of materials issued for production • This method is difficult to operate, specially when
purposes to specific jobs represent actual and purchases and issues are numerous.
correct costs.
• This method is best suited for non-standard
and specific products.

PANORAMIC EDUCATION 39
(ii) FIFO (First-in First-out) 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.
Advantages Disadvantages
• It is simple to understand and easy to operate. • If the prices fluctuate frequently, this method may
lead to clerical error.
• Material cost charged to production represents • Since each issue of material to production is related
actual cost with which the cost of production to a specific purchase price, the costs charged to
should have been charged. the same job are likely to show a variation from
period to period.
• In the case of falling prices, the use of this • In the case of rising prices, the real profits of the
method gives better results. concern being low, while the profits in the books
will appear high. This may lead to inability of the
firm to meet the materials purchase demand at the
current market price.
• Closing stock of material will be represented
very closely at current market price.

(iii) Last-in-First-out (LIFO) Method: It is a method of pricing the issues of materials on the basis of 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 than the quantity of the latest lot, then earlier (lot) and its price will also be taken into
consideration.

Advantages Disadvantages
• The cost of materials issued will be either nearer • Calculation under LIFO system becomes
to and or will reflect the current market price. complicated and cumbersome when frequent
Thus, the cost of goods produced will be related to purchases are made at highly fluctuating rates.
the trend of the market price of materials. Such a
trend in price of materials enables the matching of
cost of production with current sales revenues.
• The use of the method during the period of rising • Costs of different similar batches of production
prices does not reflect undue high profit in the carried on at the same time may differ a great
income statement as it was under the first-in-first- deal.
out or average method. In fact, the profit shown
here is relatively lower because the cost of
production takes into account the rising trend of
material prices.
• In the case of falling prices profit tends to rise due • In time of falling prices, there will be need for
to lower material cost, yet the finished products writing off stock value considerably to stick to the
appear to be more competitive and are at market principle of stock valuation, i.e., the cost or the
price. market price whichever is lower.
• Over a period, the use of LIFO helps to iron out the • This method of valuation of material is not
fluctuations in profits. acceptable to the income tax authorities.

PANORAMIC EDUCATION 40
 • In the period of inflation LIFO will tend to show the
correct profit and thus avoid paying undue taxes
to some extent.

Dhyaan Rahe:

LIFO is not permitted under AS 2 or Ind AS 2

(iv) Base Stock Method: Minimum quantity of stock under this method is always held at a fixed price as reserve
in the stock, to meet the state of emergency, if it arises. This minimum stock is known as base stock and is
valued at a price at which the first lot of materials is received and remains unaffected by subsequent price
fluctuations.

This method of valuing inventory is different from other methods of valuing issues, as the base stock of
materials are valued at the original cost, whereas, materials other than the base are valued using other
methods like FIFO, LIFO etc.

Average Price Methods

(i) Simple Average Price Method: Materials issued are valued at average price, which is calculated by dividing the
total of rates at which different lot of materials are purchased by total number of lots. In this method quantity
purchased in each lot is ignored. However, the price of stock of that lot which is completely sold out is not
considered for taking average price.
This method is suitable when the materials are received in uniform lots of similar quantity, and prices do not
fluctuate considerably.
Advantages Disadvantages
• This method is simple to use for an entity which • This method does not provide right stock
orders materials in a lot of standard quantity, as valuation when standard quantity for purchase in
only price per lot is taken to calculate average a lot is not specified.
price
• In a stable price environment, this method gives a • When price of materials fluctuates and the entity
price which approximates to the current market chooses to customise the order quantity, the price
price. under this method may differ substantially from
the current market price.

(ii) Weighted Average Price Method: Unlike Simple Average Price method, this method gives due weightage to
quantities also. Under this method, issue price is calculated by dividing sum of products of price and quantity by
total number quantities.
This method is useful in case when quantity purchased under each lot is different and price fluctuates frequently.
Advantages Disadvantages
• It smoothens the price fluctuations, if at all it is • Material cost does not represent actual cost price
there, due to material purchases. and therefore, a different profit or loss will arise
out of such a pricing method.
• Issue prices need not be calculated for each issue • It may be difficult to compute, since every time lot
unless new lot of materials is received. is received, it would require re-computation of
issue prices.

PANORAMIC EDUCATION 41
Market Price Methods
(i) Replacement Price Method: Replacement price is defined as the price at which it is possible to purchase an item,
identical to that which is being replaced or revalued. Under this method, materials issued are valued at the
replacement cost of the items. The product cost under this method is at current market price, which is the main
objective of the replacement price method. This method is useful to determine true cost of production and to value
material issues in periods of rising prices, because the cost of material considered in cost of production would be
able to replace the materials at the increased price.

(ii) Realisable Price Method: Realisable price means a price at which the material to be issued can be sold in the
market. This price may be more or may be less than the cost price at which it was originally purchased. Like
replacement price method, the stores ledger would show profit or loss in this method too.

Notional Price Methods

(i) Standard Price Method: Materials are priced at some predetermined rate or standard price irrespective of the
actual purchase cost of the materials. Standard cost is usually fixed after taking into consideration the following
factors:
(a) Current prices,
(b) Anticipated market trends, and
(c) Discount available and transport charges etc.
Standard prices are fixed for each material and the requisitions are priced at the standard price. This method
is useful for controlling material cost and determining the efficiency of purchase department. In the case of
highly fluctuating prices of materials, it is difficult to fix their standard cost on long-term basis.
Advantages Disadvantages
• The use of the standard price method simplifies the • The use of standard price does not reflect the market
task of valuing issues of materials. price and thus results in a different or incorrect profit
or loss.
• It facilitates the control of material cost and the task • The fixation of standard price becomes difficult
of judging the efficiency of purchase department. when prices fluctuate frequently
• It reduces the clerical work.

(ii) Inflated Price Method: In case material suffers loss in weight due to natural or climatic factors, e.g.,
evaporation, the issue price of the material is inflated to cover up the losses.

(iii) Re-use Price Method: When materials are rejected and returned to the stores or a processed material is put
to some other use, other than for the purpose it is meant, then such materials are priced at a rate quite
different from the price paid for them originally. There is no final procedure for valuing use of material.

Treatment of normal and abnormal loss of materials

Waste Scrap Spoilage Defectives Obsolescence
Lost during storage Discarded and Materials which are Units which do not Loss in the value of an asset
or production disposed-off without badly damaged in meet the quality due to technological
further treatment manufacturing standards. advancements.
operations.
Normal- Normal- Normal- [Inherent Normal- Abnormal loss:
Absorbed by good Borne by good units in the operation] Charged to It does not form part of the
production units. and realisable value Charging it to the material cost of cost of manufacture.
production good production.
overhead Realisable

PANORAMIC EDUCATION 42
 is deducted from the value is credited to (Cost- Realisable
cost. production Value)
overhead account.
Abnormal- Abnormal- Abnormal- Abnormal-
Transferred to Transferred to Transferred to Transferred to
Costing P & L A/c. Costing P & L A/c. Costing P & L A/c. Costing P & L A/c.
Difference between Waste and Scrap

Waste Scrap
1. It is connected with raw material or inputs to the 1. It is the loss connected with the output
production process.
2. Waste of materials may be visible or invisible. 2. Scraps are generally identifiable and has physical
substance.
3. Generally, waste has no recoverable value. 3. Scraps are termed as by-products and has small
recoverable value.

Difference between Scrap and Defectives

1. It is the loss connected with the output 1. This type of loss is connected with the output as well
as the input.
2. Scraps are not intended but cannot be eliminated 2. Defectives also are not intended but can be
due to the nature of material or process itself. eliminated through a proper control system.
3. Generally, scraps are not used or rectified. 3. Defectives can be used after rectification.
4. Scraps have insignificant recoverable value. 4. Defectives are sold at a lower value from that of the
good one.

PANORAMIC EDUCATION 43
 Valuation of material receipts
1. An invoice in respect of a consignment of chemicals A and B provides the following information:
Rs.
Chemical A: 10,000 kgs. at Rs. 10 per kg. 1,00,000
Chemical B: 8,000 kgs. at Rs. 13 per kg. 1,04,000
Basic custom duty @ 10% (Credit is not allowed) 20,400
Railway freight 3,840
Total cost 2,28,240
A shortage of 500 kgs. in chemical A and 320 kgs. in chemical B is noticed due to normal breakages. You are
required to determine the rate per kg. of each chemical, assuming a provision of 2% for further deterioration.
2. At what price per unit would part No A 32 be entered in the stores Ledger, if the following invoice was received
from a supplier:
Invoice Rs.
200 units Part No. A32 @ Rs. 5 1,000.00
Less: 20% discount (200.00)
800.00
Add: IGST @ 12% 96.00
896.00
Add: Packing Charges (5 Non-returnable boxes) 50.00
946.00
I. A 2 percent cash discount will be given if payments is made in 30 days.
II. Documents substantiating payment of IGST is enclosed for claiming input credit.

3. A manufacturing organization has imported four types of material. The invoice reveals the following data:
Material Quantity Kg Rate US $ per kg.
A 1000 1.50
B 2000 1.25
C 1500 2.00
D 3000 1.00
Import duty 23% of invoice value
Insurance 2% of invoice value
Freight and clearance Rs. 30,000
Exchange Rate US$1 Rs. 16.00
50% of the material imported are issued to production centres. While determining the value of closing stock 5%
allowance is provided to cover up storage loss. Determine the value of closing stock of each type of materials.

PANORAMIC EDUCATION 44
 Inventory Control- By Setting Quantitative Levels
[Re-order Quantity (EOQ), Reorder Level, Minimum Level, Maximum Level, Average Stock Level,
Danger Stock Level, Buffer Stock]
4. 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 Rs. 50
Cost per kg. of raw materials Rs. 2
Storage costs 8% on average inventory

5. From the following information:

Annual Demand 5,000 units
Unit price Rs. 20.00
Order cost Rs. 16.00
Storage rate 2% per annum
Interest rate 12% per annum
Obsolescence rate 6% per annum
I. Compute Economic Order Quantity and the total variable cost.
II. Determine the total cost that would result for the items if a new price of Rs. 12.80 is used

6. Anil & Company buys its annual requirement of 36,000 units in 6 instalments. Each unit costs Rs. 1 and the
ordering cost is Rs. 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?

7. 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 Rs. 200 per order
(iii) Cost per unit of Alpha Rs. 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. Advise whether the quantity discount offer can be accepted.

8. The complete Gardener is deciding on the economic order quantity for two brands of lawn fertilizer - Super
Grow and Nature’s Own. The following information is collected:
FERTILIZER
Super Grow Nature’s Own
Annual demand 2,000 bags 1,280 bags
Relevant ordering cost per purchase order Rs. 1,200 Rs. 1,400
Annual relevant carrying cost per bag Rs. 480 Rs. 560

PANORAMIC EDUCATION 45
 Required:
I. COMPUTE EOQ for Super Grow and Nature’s own.
II. For the EOQ, WHAT is the sum of the total annual relevant ordering costs and total annual relevant
carrying costs for Super Grow and Nature’s own?
III. For the EOQ, COMPUTE the number of deliveries per year for Super Grow and Nature’s own.

9. Your factory buys and uses a component for production at Rs. 10 per unit. Annual requirement is 2000 units.
Carrying cost of inventory is 10 per cent p.a. and ordering cost is Rs. 40 per order. The purchase manager agrees
that as the ordering cost is high, it is advantageous to place a single order for the entire annual requirement. He
also says that if they order 2000 units at a time, they can get 3 per cent discount from the supplier. Evaluate his
proposal and make your recommendation.

10. A materials manager has the following data for procuring a particular item. Annual Demand = 1000. Ordering
cost = Rs. 800. Inventory carrying cost = 40%. Cost per item = Rs. 60. If the order-quantity is more than or equal
to 300, a discount of 10% is given. For how much should he place the order in order to minimize total variable
cost?
11. A company manufactures a product from a raw material, which is purchased at Rs. 60 per kg. The company
incurs a handling cost of Rs. 360 plus freight of Rs. 390 per order. The incremental carrying cost of inventory of
raw material is Rs. 0.50 per kg, per month. In addition, the cost of working capital finance on the investment in
inventory of raw material is Rs. 9 per kg. per annum. The annual production pf the product is 1,00,000 units and
2.5 units are obtained from one kg. of raw material.
Required:
I. Calculate the economic order quantity of raw materials.
II. Advise, how frequently should orders for procurement be placed.
III. If the company propose to rationalize placement of orders on quarterly basis, what percentage of discount
in the price of raw materials should be negotiated?

12. 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 annum of average
inventory investment.
Required:
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 should the next order to be placed. (Assuming that the company does maintain a safety
stock and that the present inventory level is 333 packs with a year of 360 working days.

13. The following information relating to a type of Raw material is available:

Annual demand 2,000 units
Unit price Rs. 20.00
Ordering cost per order Rs. 20.00
Storage cost 2% p.a.

PANORAMIC EDUCATION 46
 Interest rate 8% p.a.
Lead time Half-month
Calculate economic order quantity and total annual inventory cost of the raw material.

14. KL Limited produces product 'M' which has a quarterly demand of 8,000 units. The product requires 3 kg.
quantity of material 'X' for every finished unit of product. The other information are follows:
Cost of material 'X' Rs. 20 per kg
Cost of placing an order Rs. 1,000 per order
Carrying Cost 15% per annum of average inventory
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 installments?

15. Primex Limited produces product 'P'. It uses annually 60,000 units of a material 'Rex' costing Rs. 10 per unit.
Other relevant Informations are:
Cost of placing an order Rs. 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 calculated:
I. Economic Order Quantity for material 'Rex'. II. Re-order Level
III. Maximum Stock Level IV. Average Stock Level

16. The purchase Manager of an organization has collected the following data for one of the A class items.
Interest of the locked up capital 20%
Order processing cost (Rs.) for each order Rs. 100
Inspection cost per lot Rs. 50
Follow up cost for each order Rs. 80
Pilferage while holding inventory 5%
Other holding cost 15%
Other procurement cost for each order Rs. 170
Annual Demand 1000 units
Cost per item Rs. 10
Discount for a minimum order quantity of 500 items is 10%.
What should be the ordering policy of the Purchase Manager.

17. 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 31st March, 2020:
Annual demand of ‘SKY BLUE 12000 units
Cost of placing an order Rs. 1,800
Cost per unit of SKY BLUE Rs. 640
Carrying cost per annum 18.75%

PANORAMIC EDUCATION 47
 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:
I. Compute the Economic Order Quantity.
II. Advise whether the quantity discount offer can be accepted.

18. Aditya Brothers supplies surgical gloves to nursing homes and polyclinics in the city. These surgical gloves are
sold in pack of 10 pairs at price of Rs. 250 per pack.
For the month of April 2020, 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 Rs.228 per pack within a 4 to 6 days lead
time. The ordering and related cost is Rs.240 per order. The storage cost is 10% p.a. of average inventory
investment.
Required:
I. Calculate the Economic Order Quantity (EOQ)
II. Calculate the number of orders needed every year
III. Calculate the total cost of ordering and storage of the surgical gloves.
IV. 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).

19. Arnav Ltd. manufactures a product X which requires two raw materials A and B in a ratio of 1:4. The sales
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 A is required.
Stock position at the beginning of the year is as below:
Product- X 12,000 units Material A 24,000 units Material B 52,000 units
To place an order, the company has to spend Rs. 15,000. The company is financing its working capital using a
bank cash credit @13% p.a.
Product X is sold at Rs. 1,040 per unit. Material A and B is purchased at Rs.150 and Rs.200 respectively.
Required:
Compute economic order quantity (EOQ):
I. If purchase order for the both materials is placed separately.
II. If purchase order for the both materials is not placed separately.

20. Two components A and B are used as follows:

Normal usage 50 units per week each
Minimum usage 25 units per week each
Maximum usage 75 units per week each
Reorder Quantity A 300 units, B 500 units
Reorder Period A 4 to 6 weeks, B 2 to 4 weeks
Calculate for each component (a) Re-order level, (b) minimum level, (c) Maximum level, (d) Average Stock Level

21. From the details given below, calculate:

I. Re-ordering level II. Minimum level III. Maximum level IV. Danger level V. Re-ordering quantity
Cost of placing a purchase order is Rs. 20. Number of units to be purchased during the year is 5000 Purchase
price per units inclusive of transportation cost is Rs. 50 Annual cost of storage per unit is Rs. 5
Details of lead time: Average 10 days, Maximum 15 days, Minimum 6 days. For emergency purchase 4 days.
Rate of consumption: Average: 15 units per day, Maximum: 20 units per day.

PANORAMIC EDUCATION 48
22. Tubes Ltd. are the manufacturers of picture tubes for T.V. the following are the details of their operation during
2020:
Average monthly market demand 2,000 Tubes
Ordering cost Rs. 100 per order
Inventory carrying cost 20% per annum
Cost of tubes Rs. 500 per tube
Normal usage 100 tubes per week
Minimum usage 50 tubes per week
Maximum usage 200 tubes per week
Lead time to supply 6 – 8 weeks
Compute from the above:
I. Economic order quantity. If the supplier is willing to supply quarterly 1,500 units at a discount of 5%, is it
worth accepting?
II. Maximum level of stock.
III. Minimum level of stock.
IV. Re-order level.

23. A company manufactures 5,000 units of a product per month. The cost of placing an order is Rs. 100. The
purchase price of the raw material is Rs. 10 per kg. The re-order period is 4 to 8 weeks. The consumption
of raw materials varies from 100 kg to 450 kg per week, the average consumption being 275 kg. The
carrying cost of inventory is 20% per annum. You are required to calculate:
I. Re-order II. Re-order level III. Maximum IV. Minimum V. Average stock
quantity level level level

24. M/s. SJ Private Limited manufactures 20000 units of a product per month. The cost of placing an order is Rs.
1,500. The purchase price of the raw material is Rs.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

25. A company uses four raw materials A, B, C and D for a particular product for which the following data apply:
Raw Usage per Re-order Price per Delivery period (in weeks) Re- order Minimum level (Kg.)
Material unit of Quantity Kg. (Rs.) level (Kg.)
product (Kg.) Minimum Average Maximum
(Kg.)
A 12 12,000 12 2 3 4 60,000 ?
B 8 8,000 22 5 6 7 70,000 ?

PANORAMIC EDUCATION 49
 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?

26. “ZEE” is a product manufactured out of 3 raw materials ‘M’ ‘N’ and ‘Q’. Each unit of ZEE requires 10 kg, 8kg and
6kg of M, N and Q respectively. The re-order levels of ‘M’ and ‘N’ are 15000 kg and 10000 kg respectively while
the minimum level of Q is 2500 kgs. The weekly production of ZEE varies from 300 to 500 units, while the weekly
average production is 400 units. You are required to compute:
I. The minimum stock level of M,
II. The maximum stock level of N, and
III. The re-order level of Q.
The following additional data are given:
Particulars M N Q
Reorder quantity (in kg) 20,000 15,000 20,000
Delivery (in weeks)
Minimum 2 4 3
Average 3 5 4
Maximum 4 6 5

27. From the following information, you are required to calculate maximum level, minimum level and ordering level
for materials X and Y;
Normal usage per week 150 200
Re-ordering quantity 900 1500
Maximum usage per week 225 250
Minimum usage per week 75 100
Re-ordering period (weeks) 12 to 18 6 to 12

28. Aditya 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 Dee:
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 Rs. 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
Rs. 720 on paper and documentation work.

PANORAMIC EDUCATION 50
 From the above information find out the followings in relation to raw material Dee:
(i) Re-order Quantity (ii) Maximum Stock (iii) Minimum Stock
level level
(iv) Calculate the impact on the profitability of the company by not ordering the EOQ. [Take
364 days for a year]

29. Rounak Ltd. is the manufacturer of monitors for PCs. A monitor requires 4 units of Part-M. The following are the
details of its operation during 2020:
Average monthly market demand 2,000 Monitors
Ordering cost Rs. 1,000 per order
Inventory carrying cost 20% per annum
Cost of Part Rs.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:
I. Economic Order Quantity (EOQ). If the supplier is willing to supply quarterly 30,000 units of Part-M at a
discount of 5%, is it worth accepting?
II. Reorder level
III. Maximum level of stock
IV. Minimum level of stock.

30. RST Limited has received an offer of quantity discount on its order of materials as under.
Price per ton Ton numbers
Rs. 9,600 Less than 50
Rs. 9,360 50 and less than 100
Rs. 9,120 100 and less than 200
Rs. 8,880 200 and less than 300
Rs. 8,640 300 and above
The annual requirement for the material is 500 tonnes. The ordering cost per order is Rs. 12,500 and
stock-holding cost is estimated at 25% of the material cost per annum.
Required:
I. Compute the most economical purchase level.
II. Compute EOQ if there are no quantity discount and the price per ton is Rs. 10,500.

31. The quarterly production of a company’s product which has a steady market is 20,000 units. Each unit of a
product requires 0.5 kg of raw material. The cost of placing one order for raw material is Rs. 100 and the
inventory carrying cost is Rs. 2 per annum. The lead time for procurement of raw material is 36 days and a safety
stock of 1,000 kg of raw material 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

PANORAMIC EDUCATION 51
 Upto 6,000 Nil
6,000 – 8,000 400
8,000 – 16,000 2,000
16,000 – 30,000 3,200
30,000 – 45,000 4,000
You are required to:
I. Calculate the re-order point taking 30 days in a month.
II. Prepare a statement showing the total cost of procurement and storage of raw material after considering
the discount if the company elects to place one, two, four or six order in the year.
III. State the number of orders which the company should place to minimize the costs after taking EOQ also
into consideration.

32. Assume that the following quantity discount schedule for a particular bearing is available to a retail store.
Order size
Units Discount
0 – 49 0%
50 – 99 5%
100 – 199 10%
200 and above 12%
The cost of a single bearing with no discount is Rs. 30. The annual demand is 250 units. Ordering cost is Rs. 20
per order and annual inventory carrying cost is Rs. 4 per unit. Determine the optimal order quantity and the
associated minimum total cost of inventory and purchasing costs.

33. The purchase department of your organization has received an offer of quantity discounts on its orders of
material as under:
Price per ton Rs. Tons
1,400 Less than 500
1,380 500 and less than 1,000
1,360 1,000 and less than 2,000
1,340 2,000 and less than 3,000
1,320 3,000 and above
The annual requirement of the material is 5,000 tons. The delivery cost per order is Rs. 1,200 and the annual
stock holding cost is estimated at 20 per cent of the average inventory.
The purchase department want you to consider the following purchase options and advise which among them
will be the most economical ordering quantity, presenting the relevant information in a tabular form.
The purchase quantity options to be considered are 400 tons, 500 tons, 1,000 tons, 2,000 tons and 3,000 tons.

34. X Ltd. has received an offer of quantity discounts on its order of material as under
Price per ton (Rs.) Tonnes
1200 Less than 500
1180 500 and up to 1,000
1160 1000 and up to 2,000
1140 2000 and up to 3000
1120 3000 and above
I. The annual requirement for the material is 5000 tons. The ordering cost per order is Rs. 1,200 and the

PANORAMIC EDUCATION 52
 stock holding cost is estimated at 20 per cent of materials cost per annum. You are required to compute
economic order quantity.
II. What would be your answer to the above if there is no discount offered and the price per ton is Rs. 1,500?

Inventory Stock- Out

35. M/s Tyrotubes trades in four wheeler tyres and tubes. It stocks sufficient quantity of tyres of almost every
vehicle. In year end 2019-20, the report of sales manager revealed that M/s Tyrotubes experienced stock-out
of tyres.
The stock-out data is as follows:
Stock-out of Tyres No. of times of Stock Out
100 2
80 5
50 10
20 20
10 30
0 33
M/s Tyrotubes loses Rs. 150 per unit due to stock-out and spends Rs. 50 per unit on carrying of inventory.
Determine optimum safest stock level.
Inventory Control- On the basis of Relative Classification [ABC Analysis]
36. From the following details, DRAW a plan of ABC selective control:
Item Units Unit cost (Rs.) Item Units Unit cost (Rs.)
1 7,000 5.00 7 60,000 0.20
2 24,000 3.00 8 3,000 3.50
3 1,500 10.00 9 300 8.00
4 600 22.00 10 29,000 0.40
5 38,000 1.50 11 11,500 7.10
6 40,000 0.50 12 4,100 6.20

37. 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
inventory holding (average) (in 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.

PANORAMIC EDUCATION 53
 Inventory Control- Using Ratio Analysis
38. The following data are available in respect of material X for the year ended 31st March, 2021:
Opening stock Rs. 90,000
Purchases during the year Rs.2,70,000
Closing stock Rs.1,10,000
Calculate: (i) Inventory turnover ratio and (ii) the number of days for which the average inventory is held.

39. From the following data for the year ended 31st December, 2021, calculate the inventory turnover ratio of the
two items and put forward your comments on them.
Material A (Rs.) Material B (Rs.)
Opening stock 1.1.20X1 10,000 9,000
Purchase during the year 52,000 27,000
Closing stock 31.12.20X1 6,000 11,000

Valuation of Material Issues

40. The following transactions in respect of material Y occurred during the six months ended 30 th June, 2021:
Month Purchase (units) Price per unit (Rs.) Issued units
January 200 25 Nil
February 300 24 250
March 425 26 300
April 475 23 550
May 500 25 800
June 600 20 400
Required
I. 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? Detailed stores ledgers are not required.
II. State when and why would you recommend the LIFO method of pricing material issues?

41. Prepare a Store Ledger Account from the following transactions of XY Company Ltd.
April, 2021
1 Opening balance 200 units @ Rs. 10 per unit.
5 Receipt 250 units costing Rs. 2,000
8 Receipt 150 units costing Rs. 1,275
10 Issue 100 units
15 Receipt 50 units costing Rs. 500
20 Shortage 10 units
21 Receipt 60 units costing Rs. 540
22 Issue 400 units
The issues upto 10-4-2021 will be priced at LIFO and from 11-4-2021 issues will be priced at FIFO. Shortage will
be charged as overhead.

PANORAMIC EDUCATION 54
42. The following information is provided by Sunrise Industries for the fortnight of April, 2020:
Material Exe:
Stock on 1-4-2020 Purchases Issues
100 units at Rs. 5 per unit 5-4-2020, 300 units at Rs. 6 6-4-2020, 250 units
8-4-2020, 500 units at Rs. 7 10-4-2020, 400 units
12-4-2020, 600 units at Rs. 8 14-4-2020, 500 units
Required:
I. 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 15-4-2020.
II. 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 Ledgers.

43. The following are the details of receipts and issues of a material of stores in a manufacturing company for the
period of three months ending 30th June, 2021:
Receipts:
Date Quantity (Kg.) Rate per kg.
(Rs.)
April 10 1,600 5.00
April 20 2,400 4.90
May 5 1,000 5.10
May 17 1,100 5.20
May 25 800 5.25
June 11 900 5.40
June 24 1,400 5.50
There was 1,500 kg. in stock at April 1, 2021 which was valued at Rs. 4.80 per kg.
Issues:
Date Quantity (Kg.)
April 4 1,100
April 24 1,600
May 10 1,500
May 26 1,700
June 15 1,500
June 21 1,200
Issues are to be priced on the basis of weighted average method.
The stock verifier of the company reported a shortage of 80 kgs. on 31st May, 2021 and 60 kgs. on
30th June, 2021. The shortage is treated as inflating the price of remaining material on account of
shortage.
You are required to prepare a Stores Ledger Account.

PANORAMIC EDUCATION 55
44. 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
(Rs.)
15-12-19 Purchase Order- 008 10,000 9,930
30-12-19 Purchase Order- 009 10,000 9,780
01-01-20 Opening stock 3,500 9,810
05-01-20 GRN*-008 (against the Purchase Order- 008) 10,000 -
05-01-20 MRN**-003 (against the Purchase Order- 008) 500 -
06-01-20 Material Requisition-011 3,000 -
07-01-20 Purchase Order- 010 10,000 9,750
10-01-20 Material Requisition-012 4,500 -
12-01-20 GRN-009 (against the Purchase Order- 009) 10,000 -
12-01-20 MRN-004 (against the Purchase Order- 009) 400 -
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- 010) 10,000 -
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. PREPARE Store Ledger for the period January 2020 and DETERMINE the value of stock as on 31-01-
2020.
V. Value of components used during the month of January, 2020.
VI. Inventory turnover ratio.

Miscellaneous
45. After the annual stock taking you come to know of some significant discrepancies between book stock and
physical stock. You gather the following information: -
Item Stock card units Stores ledger units Physical check units Cost/ unit (Rs.)
A 600 600 560 60
B 380 380 385 40
C 750 780 720 10
I. What action should be taken to record the information shown.
II. Suggest reasons for the shortage and discrepancies disclosed above.

46. Raw materials ‘AXE’ costing Rs. 150 per kg. and ‘BXE’ costing Rs. 90 per kg. are mixed in equal proportions for
making product ‘A’. 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 ‘BXE’ is not easily available and substitute raw material ‘CXE’ has been found for ‘BXE’ costing Rs. 75

PANORAMIC EDUCATION 56
 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 materials ‘AXE’ and ‘CXE’.

47. A company has the option to procure a particular material from two sources:
Source I assure 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 from it, it is
observed that defective percentage is 2.8%.
The material is supplied in lots of 1,000 units. Source II supplies the lot at a price, which is lower by Rs. 100 as
compared to Source I. The defective units of material can be rectified for use at a cost of Rs. 5 per unit.
You are required to find out which of the two sources is more economical.

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

49. HBL Limited produces product 'M' which has a quarterly demand of 20,000 units. Each product requires 3 kg.
and 4 kg. of material X and Y respectively. Material X is supplied by a local supplier and can be procured at factory
stores at any time, hence, no need to keep inventory for material X. The material Y 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-X Material- Y
Purchase price per kg. (excluding GST) Rs. 140 Rs. 640
Rate of GST 18% 18%
Freight per trip (fixed, irrespective of quantity) - Rs. 28,000

PANORAMIC EDUCATION 57
 Loss of materials in transit* - 2%
Loss in process* 4% 5%
*On purchased quantity Other information:
I. The company has to pay 15% p.a. to bank for cash credit facility.
II. Input credit is available on GST paid on materials.
Required:
(i) CALCULATE cost per kg. of material X and Y.
(ii) CALCULATE the Economic Order quantity for both the materials.

Questions from recent Exams

50. GHI Ltd. manufactures ‘Stent’ that is used by hospitals in heart surgery. As per the estimates provided by
Pharmaceutical Industry Bureau, there will be a demand of 40 million ‘Stents’ in the coming year. GHI Ltd. is
expected to have a market share of 2.5% of the total market demand of the Stents in the coming year. It is
estimated that it costs Rs. 1.50 as inventory holding cost per stent per month and that the set-up cost per run
of stent manufacture is Rs. 225.
Required:
I. What would be the optimum run size for Stent manufacture?
II. What is the minimum inventory holding cost?
Assuming that the company has a policy of manufacturing 4,000 stents per run, how much extra costs the
company would be incurring as compared to the optimum run suggested in (i) above?

51. An automobile company purchases 27,000 spare parts for its annual requirements. The cost per order is
Rs. 240 and the annual carrying cost of average inventory is 12.5%. Each spare part costs Rs. 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.
How frequently should orders for procurement be placed under EOQ model?
52. AUX Ltd has an Annual demand from a single customer for 60,000 Covid-19 vaccines. The customer prefers to
order in the lot of 15,000 vaccines per order. The production cost of vaccine is Rs 5000 per vaccine. The set-up
cost per production run of COVID-19 vaccines is Rs 4800. The carrying cost is Rs 12 per vaccine per month.
You are required to:
I. Find the most Economical Production Run
II. Calculate the extra cost that company incurs due to production of 15,000 vaccines in a batch.

53. MM Ltd has provided the following information about the items in its inventory.
Item Code Number Units Unit Cost(Rs)
101 25 50
102 300 01
103 50 80
104 75 08
105 225 02
106 75 12
MM Ltd had adopted the policy of classifying the items constituting 15% or above of Total inventory Cost as ‘A’
category, items constituting 6% less of total inventory cost as ‘C’ category and the remaining items as ‘B’
category.

PANORAMIC EDUCATION 58
 You are required to:
I. Rank the items on the basis of % of total inventory cost.
II. Classify the items into A, B and Categories as per ABC Analysis of Inventory Control adopted by MM Ltd.

54. 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.
Particular Material A Material B
Opening stock as on 01.04.2020 30,000 32,000
Purchase during the year 90,000 51,000
Closing stock as on 31.03.2021 20,000 14,000
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.)

55. A Limited a toy company purchases its requirement of raw material from S limited at Rs 120 per kg. The company
incurs a handling cost of Rs 400 plus freight of Rs 350 per order. The incremental carrying cost of inventory of raw
material is Rs 0.25 per kg per month. In addition the cost of working capital finance on the investment in inventory
of raw material is Rs 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 a per EOQ.

56. Write down the treatment of following items associated with purchases of materials.
(i) Cash Discount
(ii) IGST
(iii) Demurrage
(iv) Shortage
(v) Basic Custom Duty

57. 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
3200 valves is desired.

You are required to determine:

(i) The Economic Order Quantity (EOQ) and the frequency of orders.
(ii) The re-order point.
(iii) The Economic Order Quantity (EOQ) if the valve costs ₹4.50 each instead of ₹1.50 each
(Assume a year consists of 360 days).

58. 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 entire year. The ratio of input and output is 8:5.
Other information about Raw Material is as follows:
Purchase price Rs 150 per kg
Re-order period 2 to 3 days

PANORAMIC EDUCATION 59
 Carrying Cost 12%
Note: Material Ae is perishable in nature and if not used within 3.5 days
To place an order for material 'Ae’, the company has to incur an administrative cost of Rs 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:
(i) Economic Order Qunatity (EOQ) for Material Ae;
(ii) Maximum stock level for Material Ae.

59. The following are the details of receipts and issues of a material of stores in a manufacturing company for the
period of three months ending 30th June, 2022:
Receipts:
Date Quantity (kg.) Rate per kg. (₹)
April 10 1,600 50.00
April 20 2,400 49.00
May 5 1,000 51.00
May 17 1,100 52.00
May 25 800 52.50
June 11 900 54.00
June 24 1,400 55.00
There was 1,500 kg. in stock at April 1, 2022 which was valued at Rs 48.00 per kg.
Date Quantity (kg.)
April 4 1,100
April 24 1,600
May 10 1,500
May 26 1,700
June 15 1,500
June 21 1,200
Issues are to be priced on the basis of weighted average method.
The stock verifier of the company reported a shortage of 80 kgs. on 31st May, 2022 and 60 kgs. on 30th June,
2022. You are required to PREPARE a Stores Ledger Account.

60. Reliable India Pvt Ltd is a startup company engaged in manufacturing of Agro Tech product from a raw material,
which is purchased at Rs 190 per kg. The company incurs a handling cost of Rs 1,470 plus, freight of Rs 770 per
order. The incremental carrying cost of inventory of raw material is Rs 3 per kg per month. In addition, the cost
of working capital finance on the investment in inventory of raw material is Rs 20 per kg per annum. The annual
production of the product is 1,50,000 units and 3 units are obtained from one kg. of raw material. Assume 360
days in a year.
Required:
(i) Calculate the economic order quantity of raw materials.
(ii) Determine, how frequently company should order for procurement be placed.
(iii) If the company proposes to rationalize placement of orders on quarterly basis, determine the percentage
of discount in the price of raw materials should be negotiated?

61. ABC Limited manufactures a product ‘AM25’ using material ‘CEE’.

The following information is available regarding material ‘CEE’:
Purchase price per unit Rs. 300
Cost of placing an order Rs. 150
Carrying cost per unit per annum 6% of purchase price

PANORAMIC EDUCATION 60
 Consumption of material ‘CEE’ per annum 1,94,400 units
Lead time Average 6 days, Maximum 8 days, Minimum 4 days
Maximum consumption of material ‘CEE’ per day is 200 kg more than the average consumption per day.
Required:
Calculate the following in relation to material ‘CEE’:
(i) Economic Order Quantity.
(ii) Reorder Level
(iii) Maximum Stock Level. (Assume 360 days in a year)

Theory Questions
1. How is slow moving and non-moving item of stores detected and what steps are necessary to reduce such
stocks?
Answer:
Detection of slow moving and non-moving item of stores:
The existence of slow moving and non-moving item of stores can be detected in the following ways.
(i) By preparing and perusing periodic reports showing the status of different items or stores.
(ii) By calculating the inventory turnover period of various items in terms of number of days/ months of
consumption.
(iii) By computing inventory turnover ratio periodically, relating to the issues as a percentage of average stock
held.
(iv) By implementing the use of a well- designed information system.
Necessary steps to reduce stock of slow moving and non-moving item of stores:
I. Proper procedure and guidelines should be laid down for the disposal of non-moving items, before they
further deteriorate in value.
II. Diversify production to use up such materials.
III. Use these materials as substitute, in place of other materials.

2. Discuss briefly the considerations governing the fixation of the maximum and minimum levels of inventory.
Answer:
Considerations for the fixation of maximum level of inventory.
Maximum level of an inventory item is its maximum quantity held in stock at any time. The mathematical
formula used for its determination is as follows:
Maximum level = Re-order level – (Min. Consumption × Min. Re-order period) + Re-order quantity
The important considerations which should govern the fixation of maximum level for various inventory items
are as follows:
I. The fixation of maximum level of an inventory item requires information about re- order level. The re-order
level itself depends upon its maximum rate of consumption and maximum delivery period. It in fact is the
product of maximum consumption of inventory item and its maximum delivery period.
II. Knowledge about minimum consumption and minimum delivery period for each inventory item should also
be known.
III. The determination of maximum level also requires the figure of re-order quantity or economic order
quantity. Economic order quantity means the quantity of inventory to be ordered so that total ordering and
storage cost is minimum.
IV. Availability of funds, storage capacity, nature of items and their price also are important for the fixation of
maximum level.
V. In the case of important materials due to their irregular supply, the maximum level should be high.

PANORAMIC EDUCATION 61
3. At the time of physical stock taking, it was found that actual stock level was different from the clerical or
computer records. What can be possible reasons for such differences? How will you deal with such differences?
Answer:
Possible reasons for differences arising at the time of physical stock taking may be as follows when it was found
that actual stock level was different from that of the clerical or computer records:
I. Wrong entry might have been made in stores ledger account or bin card,
II. The items of materials might have been placed in the wrong physical location in the store,
III. Arithmetical errors might have been made while calculating the stores balances on the bin cards or store
ledger when a manual system is operated,
IV. Misappropriation of stock.
When a discrepancy is found at the time of stock taking, the individual stores ledger account and the bin card
must be adjusted so that they are in agreement with the actual stock. For example, if the actual stock is less
than the clerical or computer record the quantity and value of the appropriate store ledger account and bin
card (quantity only) must be reduced and the difference in cost be charged to factory overhead account for
stores losses.

4. “Perpetual inventory system comprises Bin Card and Stores Ledger, but the efficacy of the system depends on
continuous stock taking.” Comment. OR Write short note on perpetual inventory control.
Answer:
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 bin cards, the Stores Ledger is maintained to record all receipt and
issue transactions in respect of materials. 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 continuous
stock taking.
The main advantages of continuous stock taking are as follows:
I. Physical stocks can be counted and book balances adjusted as and when desired without waiting for the
entire stock-taking to be done.
II. Quick compilation of Profit and Loss Accounts (for interim period) due to prompt availability of stock
figures.
III. Discrepancies are easily located and thus corrective action can be promptly taken to avoid their recurrence.
IV. 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.
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.

PANORAMIC EDUCATION 62
5. Explain obsolescence and circumstances under which materials become obsolete. State the steps to be taken
for its treatment.
Answer:
Obsolescence: Obsolescence is defined as “the loss in the intrinsic value of an asset due to its supersession”.
Materials may become obsolete under any of the following circumstances:
I. where it is a spare part, or a component of a machinery used in manufacture and that machinery
becomes obsolete;
II. where it is used in the manufacture of a product which has become obsolete;
III.where the material itself is replaced by another material due to either improved quality or fall in price.
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.

6. Explain: ‘FIFO and LIFO method of stores issue.’

Answer:
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.
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 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.

Additional Theory Questions

7. How normal and abnormal loss of material arising during storage treated in Cost Accounts?
8. Distinguish clearly Bin cards and Stores Ledger.
9. Discuss the accounting treatment of defectives in Cost Accounts.
10. Explain the concept of "ABC Analysis" as a technique of inventory control
11. Discuss the accounting treatment of spoilage and defectives in Cost Accounting.
12. Distinguish between Bill of Materials and Material Requisition Note.
13. Explain 'Just In Time' (JIT) approach of inventory management.
14. Define Inventory Control and give its objectives. List down the basis to be adopted for Inventory Control.
15. 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.
16. Write a short note on VED analysis of Inventory Control.
17. What is Bill of Material? Describe the uses of Bill of Material in following departments:

PANORAMIC EDUCATION 63
 I. Purchases Department
II. Production Department
III. Stores Department
IV. Cost / Accounting Department
18. Which system of inventory management is know as ‘Demand pull’ or ‘Pull through’ system of production?
Explain. Also, specify the two principles on which this system is based.
19. How does the high employee turnover increase the cost of production? Explain.

PANORAMIC EDUCATION 64
MCQ

1. Material consumed is Rs. 5,00,000 Opening stock of raw material is Rs. 50,000 and Closing stock of raw
material is Rs. 25,000. What is the cost of raw material purchased?
(a) Rs. 4,50,000 (b) Rs. 4,75,000
(c) Rs. 5,25,000 (d) Rs. 5,50,000
2. Annual usage is 6000 units @ Rs. 20 per unit. Cost of placing an order is Rs. 60 and annual carrying cost of
one unit is 10 % of inventory value.
(a) 600 units (b) 750 units
(c) 1200 units (d) 1250 units.
3. If Minimum stock level is 900 units and economic order quantity is 750 units, then average stock level
(a) 825 units (b) 1275 units.
(c) 1525 units (d) 1650 units
4. Maximum usage -130 units/ day & Re-order period -25 to 30 days. Calculate re-order level.
(a) 3900 units (b) 1150 units
(c) 7400 units (d) None of the above
5. Normal usage - 100 units/ day, Minimum usage - 60 units/ day, Maximum usage -130 units/ day, EOQ - 5000
units & Re-order period - 25 to 30 days. Calculate minimum level.
(a) 3900 units (b) 1150 units
(c) 7400 units (d) None of the above
6. Calculate maximum stock level from the details: EOQ - 300 units, Usage rate - 25 to 75 units/ week & Re-
order period -4 to 6 weeks.
(a) 650 units (b) 450 units
(c) 1100 units (d) None of these
7. If Reorder quantity is 2000 units and annual carrying cost of each unit is Rs. 5 then total annual carrying costs
is:
(a) 5,000 (b) 4,500
(c) 8,000 (d) 10,000
8. Calculate Maximum level by using following data - ROQ = 186 units, Max usage = 75 units, Max Re-order
time = 6 weeks, Min usage = 25 units, Min re-order time = 4 weeks
(a) 526 units (b) 536 units
(c) 540 units (d) 546 units
9. If the demand material for one month is 1250 units and economic order quantity is 125 units then number
of orders in a year is
(a) 160 (b) 12
(c) 10 (d) 120
10. If Annual requirement of Raw material is 12000 units @ Rs. 10 p.u. ROQ = 2000 units, ordering cost per order
= Rs 100 and carrying cost is 20%, then calculate annual inventory cost
(a) 1,32,600 (b) 1,22,600
(c) 1,24,600 (d) 1,44,600
11. Calculate Re-order level from the following if Consumption per day: 100-200 units & Delivery period: 14-28
days
(a) 5600 units (b) 800 units
(c) 1400 units (d) 200 units
12. Calculate EOQ from the following details: Annual Consumption: 20000 units, Ordering cost: Rs. 20 per order,
Purchase price: Rs. 100 per unit, Carrying cost: 5% p.a.
(a) 283 units (b) 400 units (c) 290 units (d) 300 units

PANORAMIC EDUCATION 65
13. If the demand of material for one year is 25000 units, relevant ordering cost for each purchase order is
Rs.210 and annual carrying cost of one unit of stock is Rs.25 then the economic order quantity is
approximately
(a) 678 (b) 658
(c) 668 (d) 648
14. If the annual demand in units is 18000, relevant ordering cost for each order is Rs.15 and the order quantity
is 1500 then annual relevant ordering cost is
(a) Rs 200 (b) Rs 190
(c) Rs 160 (d) Rs 180
15. After inviting tenders for supply of raw materials, two quotations are received as follows—
Supplier P Rs. 2.20 per unit, Supplier Q Rs. 2.10 per unit plus Rs. 2,000 fixed charges irrespective of the
units ordered. The order quantity for which the purchase price per unit will be the same—
(a) 22,000 units
(b) 20,000 units
(c) 21,000 units
(d) None of the above
16. A Ltd. produces a final product X, which requires two components, A and B. The following are the information
related to both the components: 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 Re-order level for the component A is:
(a) 300 units (b) 150 units
(c) 450 units (d) 200 units
17. A Ltd. produces a final product X, which requires components XC. The following are the information related
to the component: Normal usage 50 per week each
Average Re-order period XC: 5 weeks.
Minimum stock level of XC is 60 units.
Re-order level for the component XC is:
(a) 310 units (b) 250 units
(c) 300 units (d) 350 units
18. A Ltd. produces a final product X, which requires components XC. The following are the information related
to the component: Normal usage 50 per week each
Average Re-order period XC: 5 weeks.
Re-order quantity is 300 units.
Minimum stock level of XC is 60 units.
Average stock level for the component XC is:
(a) 210 units (b) 250 units
(c) 550 units (d) 350 units
19. The monthly consumption of raw materials is 101400 units. The supplier usually sells this material to the
company at Rs. 130 per unit, but offers a discount of Rs. 10 if the company promises to buy more than
10,00,000 units in a year. The storage cost per unit is 10% p.a. The cost of one procurement is Rs. 75.
Calculate the most economic quantity that the company should buy.
(a) 10,00,000 units (b) 3900 units
(c) 1082 units (d) 3747 units
20. If a company produces 100000 units per year and the input output ratio is 2:1. Find the number of orders
to be placed in a year if the EOQ is 10,000 units
(a) 20 (b) 10
(c) 5 (d) 4
21. If the annual storage cost of raw materials is Rs. 1,200 and the cost of storage is 8% p.a., find the quantity
that the company usually orders if the cost per unit is Rs. 120

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 (a) 125 (b) 250
(c) 11520 (d) 5760
22. Opening stock of Rs. 50,000; 500kg were there. Next day 300kg were purchased for Rs. 21,000. Later on
200 kg were sent to next department. What is the issue price on FIFO basis of these 200kg?
(a) 20,000 (b) 14,000
(c) 11520 (d) 17750
23. Opening stock of Rs. 50,000; 500kg were there. Next day 200kg were purchased for Rs. 30,000. 300 kg
were sent to next department. What is the issue price on WAM basis of these 300kg?
(a) 20,000 (b) 30,000
(c) 34,285 (d) 35,000
24. Opening stock of Rs. 60,000; 500kg were there. Next day 200kg were purchased for Rs. 21,000. Later on
400 kg were sent to next department. What is the cost of closing balance on FIFO basis.
(a) 34714 (b) 48000
(c) 21,000 (d) 33,000
25. Opening stock of Rs. 60,000; 500kg were there. Next day 200kg were purchased for Rs. 21,000. Later on
400 kg were sent to next department. What is the cost of closing balance on WAM basis.
(a) 34714 (b) 46285
(c) 21,000 (d) 33,000
26. At EOQ level of 4000 units. Total Ordering cost is Rs. 80,000. Annual consumption is 1,60,000 units.-
Calculate Carrying cost per unit p.a.
(a) Rs.40 (b) Rs.1600
(c) Cannot be determined (d) Rs. 400.
27. Which of the following method of inventory valuation is useful when materials are purchased for a specific
job or work order:
(a) Standard cost method
(b) Cost price method
(c) FIFO method
(d) LIFO method
28. Which of the following is not a normal reason of material shortage:
(a) Evaporation
(b) Spillage
(c) Pilferage
(d) Bulk breaking
29. Which of the following not true about "Bin card":
(a) It is maintained in cost accounting department.
(b) Each transaction is individually posted
(c) Entries are made when transaction takes place
(d) It contains only quantitative details of material received and issued.
30. Which of the following statement is true:
(a) Cost of container is added to cost of material if it is non-returnable.
(b) Cost of container is added to cost of material if it is returnable.
(c) Cost of container is not added to cost of material, it is capitalised.
(d) All the above statement are incorrect.
31. Which of the following is Not added with cost of material:
(a) Road/ toll tax
(b) GST on which ITC is available.
(c) Custom duty.
(d) All of the above.

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32. This system of inventory classification, classify inventory on the basis of its criticality for the production
function and final product.
(a) Fast, Slow and Non-moving (FSN)
(b) ABC Analysis
(c) Vital, Essential and Desired (VED)
(d) High, Medium and Low (HML)
33. Which of the following is not an assumption for the calculation of economic order quantity:
(a) Ordering cost per order and carrying cost per unit per annum are known.
(b) Cost per unit of the material is to be derived.
(c) Anticipated usage of material in units is known.
(d) The quantity of material ordered is received immediately.
34. Which of the following method of inventory valuation is considered suitable during inflationary period or
period of rising prices:
(a) Standard cost method
(b) Cost price method
(c) FIFO method
(d) LIFO method
35. Which of the following method of inventory valuation is considered suitable in times of falling price:
(a) Standard cost method
(b) Cost price method
(c) FIFO method
(d) LIFO method
36. JIT inventory management is also known as:
(a) Demand Push system of production
(b) Supply Push system of production
(c) Demand Pull system of production
(d) Supply Pull system of production
37. Which of the following method of inventory valuation is considered least suitable when materials are
purchased in uneven lot sizes:
(a) Weighted Average price method
(b) Simple Average price method
(c) FIFO method
(d) LIFO method
38. Which of the following not true about "Store Ledger":
(a) Entries are made when transaction takes place.
(b) It is maintained in cost accounting department.
(c) Transactions may be summarized and then posted.
(d) It is always posted after the transaction.
39. This system of inventory classification, classify inventory according to their relative importance, namely,
their value and frequency of replenishment during a period.
(a) Fast, Slow and Non-moving (FSN)
(b) ABC Analysis
(c) Vital, Essential and Desired (VED]
(d) High, Medium and Low (HML)
40. Surekha Ltd. produces 4000 Ltrs. of paint on quarterly basis each ltrs requires 2kg of Raw material.
The cost of placing order is Rs. 200 and purchase price of raw material is Rs. 625kg less 20% Trade discount
The raw material is inspected each time it is received at Rs. 200 per receipt of order.
Company gets cash discount of 5% every time payment is done in 45 days Company generally pays all the
dues in 1 month.

PANORAMIC EDUCATION 68
 The obsolescence cost is 1% p.a, cost of storage is 3% p.a. interest cost on cash credit loan is 2% p.a. head
time of procurement is 15 days
(i)What is the annual demand of Raw material?
(a) 32000kg (b) 16000kg (c) 4000kg (d) 8000kg

(ii) What is carrying cost p.a. unit?

(a) Rs. 38 (b) Rs. 81.25 (c) Rs. 40 (d) Rs. 65

(iii) Calculate EOQ

(a) 700kg (b) 800kg (c) 650 kg (d) 850kg

(iv)State how to record gst paid on raw material:

(a) Add to cost of goods everytime

(b) Ignore in calculating cost of goods everytime

(c) Add to cost of goods if credit is available

(d) Ignore it in calculating cost of goods if credit is available

(v) State how to record fines imposed for non-compliance of rule or law by statutory authority.
(a) Add to cost of goods since it is abnormal expense

(b) Ignore in calculating cost of goods since it is abnormal expense

(c) Add to cost since it is normal expense

(d) Ignore in calculating cost of goods since it is normal expense

41. The purchase committee of A Ltd. has been entrusted to review the material procurement policy of the
company. The chief marketing manager has appraised the committee that the company at present produces
a single product X by using two raw materials A and B in the ratio of 3:2. Material A is perishable in nature
and has to be used within 10 days from Goods received note (GRN) date otherwise material becomes
obsolete. Material B is durable in nature and can be used even after one year. Material A is purchased from
the local market within 1 to 2 days of placing order. Material B, on the other hand, is purchased from
neighboring state and it takes 2 to 4 days to receive the material in the store.

The purchase price of per kilogram of raw material A and B is ₹ 30 and ₹44 respectively exclusive of taxes.
To place an order, the company has to incur an administrative cost of ₹ 1,200. Carrying cost for Material A
and B is 15% and 5% respectively. At present material A is purchased in a lot of 15,000 kg. to avail 10%
discount on market price. GST applicable for both the materials is 18% and the input tax credit is availed.

The sales department has provided an estimate that the company could sell 30,000kg. in January 2024 and
also projected the same trend for the entire year.
The ratio of input and output is 5: 3. Company works for 25 days in a month and production is carried out
evenly.
The following queries/ calculations to be kept ready for purchase committees' reference:

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(i) For the month of January 2024, what would be the quantity of the materials to be requisitioned for both
material A and B :

(a) 9,000 kg & 6,000 kg respectively

(b) 18,000kg & 12,000 kg respectively
(c) 27,000 kg & 18,000 kg respectively
(d) 30,000 kg& 20,000 kg respectively.

(ii) The economic order quantity (EOQ) for both the material A & B :

(a) 13,856 kg 16,181 kg respectively

(b) 16,197 kg 17,327 kg respectively
(c) 16,181 kg 17,165 kg respectively
(d) 13,197 kg 17,165 kg respectively

(iii) What would the maximum stock level for material $A$ :

(a) 18,200 kg.

(b) 12,000 kg.
(c) 16,000 kg.
(d) 16,200 kg.

(iv) Calculate saving/ loss in purchase of Material A if the purchase order quantity is equal to EOQ.

(a) Profit of Rs. 3,21,201.

(b) Loss of Rs. 3,21,201.
(c) Profit of Rs. 2,52,500.
(d) Loss of Rs. 2,52,500.

(v) What would the minimum stock level for material A:

(a) 1,800 kg.

(b) 1,200 kg.
(c) 600 kg.
(d) 2,400 kg.

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42. Aditya 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 Dee:
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 Rs. 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 Rs. 720 on paper and documentation work.
i) Find EOQ of Dee.

(a) 1,234 kg (b) 1,200 kg (c) 824 kg (d) 936 kg

ii)Re-order quantity

(a) 1034 kg (b) 1,000 kg (c) 624 kg (d) 736 kg

iii) Re-order level

(a) 560 kg (b) 400 kg (c) 538 kg (d) 478 kg

iv) Maximum stock level

(a) 1280 kg (b) 1418 kg (c) 1358 kg (d)1440 kg

v) Minimum stock level

(a) 100 kg (b) 260 kg (c) 238 kg (d) 178 kg

vi) Calculate the impact on the profitability of the company by not ordering the EOQ. [Take 364 days for a
year]

(a) Rs.440 loss (b) Rs. 395 profit (c) Rs. 427 loss (d) Rs. 460 profit
43. M/s. SJ Private Limited manufactures 20000 units of a product per month. The cost of placing an order is Rs.
1,500. The purchase price of the raw material is Rs .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

a) 1,890 kg b) 2,000 kg c) 277 kg d) 2,200 kg

ii. Re-order level

a) 2,100 b) 3,100 c) 2,500 d) 3,500

iii. Maximum level

a) 2100 b) 3100 c) 2,600 d) 3,500

PANORAMIC EDUCATION 71
 iv. Minimum level

a) 0 b) 600 c) 1,100 d) 900

v. Average stock level
a) 1,850 kg b) 1,600 c) 1,750 d) 1,900

44. Arnav Ltd. manufactures a product X which requires two raw materials A and B in a ratio of 1: 4. The sales
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 A is required.
Stock position at the beginning of the year is as below:
Product- X 12,000 units; Material A 24,000 units; Material B 52,000 units
To place an order, the company has to spend Rs. 15,000 . The company is financing its working capital
using a bank cash credit @ 13% p.a.
Product X is sold at Rs. 1,040 per unit. Material A and B is purchased at Rs. 150 and Rs. 200 respectively.
i) Annual production of product X

a) 5,00,000 b) 5,12,000 c) 4,88,000 d) 5,70,000

ii) Annual requirement of Raw material A

a) 4,88,000 b) 4,64,000 c) 19,52,000 d) 19,28,000

iii) Annual requirement of Raw material B

a) 78,08,000 b) 77,56,000 c) 4,88,000 d) 4,33,000

iv) EOQ of A when both orders are placed separately

a) 27,400 b) 54,800 c) 27,962 d) 54,462

v) EOQ of B when both orders are placed separately

a) 94,600 b) 94,916 c) 23,730 d) 25,479

vi) EOQ of A & B when both orders are not placed separately

a) 21,775; 87,102 b) 20,600; 70,800 c) 21,592; 86,860 d) 25,230; 72,580

45. Re-ordering quantity is to be calculated on the basis of following information:

Cost of placing a purchase order is ₹ 4,000
Number of units to be purchased during the year is 5,00,000
Purchase price per unit, inclusive of transportation cost is ₹ 50
Annual cost of storage per unit is ₹ 10.
Details of lead time: Average - 10 days, Minimum- 5 days, for emergency purchases- 4 days.
Rate of consumption: Average: 1,500 units per day,
Maximum: 2,000 units per day.

i) What is the ROL?

a) 45,000 b) 30,000 c) 20,000 d) 35,000

PANORAMIC EDUCATION 72
ii) What is the maximum level?

a) 30,000 b) 50,000 c) 35,000 d) 45,000

iii) What is the minimum level?

a) 0 b) 15,000 c) 5,000 d) 25,000

iv) What is the danger level?

a) 4,000 b) 6,000 c) 8,000 d) 10,000

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Self-Notes & Important Points

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