Topic 1

Material Cost

Topic

Material Cost
1. EOQ AND EVALUATION OF DISCOUNT POLICY

1. Ordering cost ` 75 per order, carrying cost 20%, and value of material ` 1 per unit. Annual
requirement 12000. Calculate EOQ.

2. Co produces final product X monthly demand of X is 1500 units. Final product X requires 5 kg of raw
material. Ordering cost ` 15 per order. Detoration and obsolesces cost ` 10 per unit. And co also
incurred carrying cost of 15% per annum as interest cost and co incurs storage cost of ` 450000 for
90000 units. Purchase price is ` 100 per unit. Find EOQ.

3. A manufacturer uses 200 units of a component every month and he buys them entirely from outside
supplier. The order placing and receiving cost is ` 100 and annual carrying cost is ` 12. Form this set
of data calculate EOQ. What is the ordering cost and carrying cost at EOQ level.

4. Form the following particulars find out the EOQ-

Annual demand 12,000 units
Ordering cost ` 90 per order
Inventory carrying cost per annum Rs 15

5. The annual carrying cost of Material X is ` 3.60 per unit and its total carrying cost is ` 9000 per
annum. What would be the EOQ for material X if there is no Safety Stock of material X? (Nov 08 – 2
marks)

6. The average annual consumption of a material is 18,250 units at a price of ` 36.50 per unit. The
storage cost is 20% on an average inventory and the cost of placing an order is ` 50. How much
quantity is to be purchased at a time? (Nov 07)

7. About 50 items are required every day for a machine. A fixed cost of ` 50 per order is incurred for
placing an order. The inventory carrying cost per item amounts to ` 0.02 per day. The lead period is
32 days. Compute EOQ, Reorder Level, Number of orders per year, Time lag between two purchases
and associated cost. Assume no of working days 360. (Nov 96)

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 Topic 1
Material Cost
8. CALCULATE the Economic Order Quantity from the following information. Also state the number of
orders to be placed in a year.
Consumption of materials per annum : 10,000 kg.
Order placing cost per order : ` 50
Cost per kg. of raw materials : `2
Storage costs : 8% on inventory
(SM)
9. Annual requirement – 24000 units
Ordering cost – ` 300/order
Carrying cost – ` 1.50/unit/annum
Compute inventory costs for order sizes 1000, 2000, 3000, 4000, 6000 and 12000 units.

10. Tata motors purchase 9,000 motor spare parts for its annual requirements ordering one month’s
requirement at a time. Each spare part cost ` 20. The ordering cost per order is ` 15 and the carrying
charges are 15% of the average inventory per year. You have been asked to suggest a more
economical purchasing policy for the company.

11. Ordering cost ` 75 per order, carrying cost 20%, value of material ` 1 per unit. Annual requirement
12000. Calculate EOQ. Supplier is ready to offer 5% discount if order size is 12000 units, whether this
policy is acceptable or not. If supplier is ready to offer discount of 2% if order size is 6000 units.
Assumption 1. Discount policy will not change inventory carrying cost. 2. Assume discount policy will
change inventory carrying cost.

12. Form the following particulars find out the EOQ-

Annual demand 24,000 units
Ordering cost ` 90 per order
Inventory carrying cost per annum 12%, purchase price 25 `
Advice Company if it is proposes to place monthly order if discount is 4%
Assume carrying cost will change as per discount policy.

13. The Tata motors ltd uses about 75,000 valves per year and the usage is fairly constant at 6,250 per
month. The valves cost ` 1.50 per unit when bought in quantities and the carrying cost is estimated
to be 20% of average inventory investment on the annual basis. The cost to place an order and
process the delivery is ` 18. It takes 45 days to receive from the date of an order and a safety stock
of 3,250 valves is required. You are required to determine :
i. The most economic order quantity and frequency of orders.
ii. The order point
iii. The most economic order quantity if the valves cost ` 4.50 each instead of ` 1.50 each.

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 Topic 1
Material Cost
14. The complete gardener is deciding on the EOQ for two brands of lawn fertilizers- Super Grow and
Nature’s Own. The following information is collected:
Particulars Super Grow Nature’s Own
Annual demand 2000 bags 1280 bags
Relevant Ordering Cost per purchase order ` 1200 ` 1400
Annual relevant carrying cost per bag ` 480 ` 560

i. Compute EOQ for both products

ii. For the EOQ, what is the sum of the total annual relevant ordering costs and total annual
relevant carrying costs for both products
iii. For the EOQ, compute the number of deliveries per year for both the products. (Nov 99/SM)

15. A manager has decided to place order for minimum quantity of 500 no. of a particular item in order
to get a discount of 10%. Form the records, it was found that in the last year, 8 orders each of size
200 no’s have been placed. Given ordering cost = 500/order, inventory carrying cost = 40% of
inventory value, and cost/unit = 400, is the manager justified in his decision? What is the effect of his
decision to the company?

16. Anil & Company buys its annual requirement of 36,000 units in 6 installments. Each unit costs ` 1 and
the ordering cost is ` 25. The inventory carrying cost is estimated at 20% of unit value. FIND the total
annual cost of the existing inventory policy. CALCULATE, how much money can be saved by Economic
Order Quantity? (SM)

17. The annual demand for an item of raw material is 4,000 units and the purchase price is expected to be
` 90 per unit. The incremental cost of processing an order is ` 135 and the annual cost of storage is
estimated to be ` 12 per unit. COMPUTE the optimal order quantity and total relevant cost of this
order quantity?
Suppose that ` 135 as estimated to be the incremental cost of processing an order is incorrect and
should have been ` 80. All other estimates are correct. ESTIMATE the difference in cost on account of
this error?
Assume at the commencement of the period that a supplier offers 4,000 units at a price of ` 86. The
materials will be delivered immediately and placed in the stores. Assume that the incremental cost of
placing the order is zero and original estimate of ` 135 for placing an order for the economic batch is
correct. ANALYSE, should the order be accepted? (Mock Test Paper 1 Nov 18)

18. G. Ltd. produces a product which has a monthly demand of 4,000 units. The product requires a
component X which is purchased at ` 20. For every finished product, one unit of component is
required. The ordering cost is ` 120 per order and the holding cost is 10% p.a. You are required to
CALCULATE:
a) Economic order quantity.
b) If the minimum lot size to be supplied is 4,000 units, what is the extra cost, the company has to
incur?
c) What is the minimum carrying cost, the company has to incur? (SM)

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 Topic 1
Material Cost
19. KL Limited produces product 'M' which has a quarterly demand of 8,000 units. The product requires
3kg. Quantity of material 'X' for every finished unit of product. The other information are follows:

Cost of material 'X' : ` 20 per kg.

Cost of placing an order : ` 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? (Nov 2013 – 5 marks)

20. A company manufactures a special product which requires a component Alpha. Following particulars
are collected for a year:

Particulars
Annual demand of Alpha 8,000 units
Cost per unit of Alpha ` 400
Cost of placing an order ` 200 per order
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 component at a time.
i. Compute EOQ
ii. Advise whether the quantity discount offer can be accepted? (Nov 07/SM)

21. A company manufactures a product from a raw material, which is purchased at ` 60 per kg. The
company incurs a handling cost of ` 360 plus freight of ` 390 per order. The incremental carrying
cost of inventory of raw material is ` 0.50 per kg. per month. In addition, the cost of working capital
finance on the investment in inventory of raw material is ` 9 per kg. per annum. The annual
production of the product is 1,00,000 units and 2.5 units are obtained from one kg of raw material.

Required:

(i) Calculate the economic order quantity of raw materials.

(ii) Advice, how frequently should orders for procurement be placed.
(iii) If the company proposes to rationalize placement of orders on quarterly basis, what percentage
of discount in the price of raw materials should be negotiated? (May 2014 – 8 marks)

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 Topic 1
Material Cost
22. a. COMPUTE E.O.Q. and the total cost for the following:

Particulars
Annual Demand 5,000 units
Unit price ` 20.00
Order cost ` 16.00
Storage rate 2% per annum
Interest rate 12% per annum
Obsolescence rate 6% per annum
b. ALSO DETERMINE the total cost that would result for the items if a new price of ` 12.80 is used (SM)

23. HKC Ltd manufacturers of a special product follows the policy of EOQ for one of its components. The
components details are as follows.
Purchase price of component ` 200 per component
Cost of an order ` 100
Annual cost of carrying/unit 10% of purchase price.
Total cost of inventory carrying and ordering p.a. ` 4000
The co has been offered a discount of 2% on the price of component provided the lot size is 2000
components at a time. Required
i. EOQ
ii. Advice whether the quantity discount offered can be accepted
iii. Would your advice differ if the co. is offered 5% discount on a single order. (assume that
inventory carrying cost does not change according to discount policy)

24. HKC Ltd is reviewing its stock policy, and has the following alternatives available for the evaluation of
stock :
Particulatrs Units
1 Purchase stock twice in a month 400 units
2 Purchase monthly 800 units
3 Purchase every three months 2400 units
4 Purchase Six monthly 4800 units
5 purchase annually 9600 units

It is ascertained that the purchase price per unit is ` 40 for deliveries upto 2000 units. A 5% discount
is offered by the supplier on the whole order where deliveries are 2001 to 4000 units and 10%
reduction on total order for deliveries in excess of 4000 units. Each purchase order incurs
administration costs of ` 250. Interest on capital and other storage costs are ` 12.50 per unit of
average stock quantity held. Calculate the optimum order size. (Nov 09)

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 Topic 1
Material Cost
25. EXE Limited has received an offer of quantity discounts on its order of materials as under:
Price Per ton (`) Ton (Nos.)
1,200 Less than 500
1,180 500 and less than 1,000
1,160 1,000 and less than 2,000
1,140 2,000 and less than 3,000
1,120 3,000 and above.
The annual requirement for the material is 5,000 tons. The ordering cost per order is ` 1,200 and the
stock holding cost is estimated at 20% of material cost per annum. You are required to COMPUTE the
most economical purchase level.
WHAT will be your answer to the above question if there are no discounts offered and the
price per ton is ` 1,500? (SM)
26. The purchase department of your organization has received an offer of quantity discounts on its orders
of materials as under :
Ordering quantities (tones) Price per tones `
Less than 500 1400
500 and less than 1000 1380
1000 and less than 2000 1360
2000 and less than 3000 1340
3000 and above 1320

The annual demand for the material is 5,000 tones. Stock holding costs are 20% of material cost p.a. the
delivery cost per order is ` 1200. The purchase quantity options to be considered are 400 tonnes, 500
tonnes, 1000 tonnes, 2000 tonnes, and 3000 tonnes. (May 94)

27. The quarterly production of a company’s product which has a steady market is 20000 units. Each unit of
a product requires 0.5 kg of raw material. The cost of placing one order of raw material is ` 100 and the
inventory carrying cost is ` 2 per annum. The lead time for procurement of raw material is 36 days and
a safety stock of 1000 kg of raw material is maintained by the company. The company has been able to
negotiate the following discount structure with the supplier:

Ordering quantities (kgs) Discount in `

Up to 6000 Nil
6001-8000 400
8001-16000 2000
16001-30000 3200
30001-45000 4000

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 Topic 1
Material Cost
Calculate:
a. Reorder point taking 30 days in month
b. Prepare a statement showing the total cost of procurement and storage of raw materials after
considering the discount, if the company elects to place 1,2,4 or 6 order in a year.
c. State the number of orders which the company should place to minimize the costs after taking
EOQ into consideration.

28. RST Limited has received an offer of quantity discount on its order of materials as under:
Price per ton Order Size (in ton)
` 9,600 Less than 50
` 9,360 50 and less than 100
` 9,120 100 and less than 200
` 8,880 200 and less than 300
` 8,640 300 and above
The annual requirement for the material is 500 tons. The ordering cost per order is ` 12,500 and the
stock holding cost is estimated at 25% of the material cost per annum. Required
(i) Compute the most economical purchase level.
(ii) Compute EOQ if there are no quantity discounts and the price per ton is ` 10,500. (Nov 2010 -
5 marks)

29. A company uses a purchased component in an assembly. It follows a policy of EOQ for procurement
of the component. The purchase price of the component is ` 800 each and the cost of carrying one
unit is 15% p.a. the cost of placing an order is ` 150. The company has estimated the total cost of
carrying and order placement at ` 36,000. If the supplier has offered a discount of 3% on the
purchase price if the entire requirement of component is covered in two purchase orders in a year.
Required :
i. Find EOQ
ii. Calculate the total cost of component procurement and storage if the discount offer is accepted.
Compare this cost with the total cost of EOQ.
iii. What further discount, if any should be negotiated for minimizing the cost? (assume that
inventory carrying cost does not vary according to discount policy)

30. Following information relating to a type of raw material is available :

Annual demand 2000 units
Unit price 20 `
Ordering cost per order 20 `
Storage cost 2% p.a.
Interest Rate 8% p.a.
Lead time Half month.
Calculate EOQ and total annual inventory cost in respect of the particular raw material. (Nov 08)

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 Topic 1
Material Cost
31. A limited a toy company purchases its requirement of raw material from S. limited at ` 120 per kg. The
company incurs a handling cost of ` 400 plus freight of ` 350 per order. The incremental carrying cost
of inventory of raw material is ` 0.25 per kg per month. In addition the cost of working capital finance
on the investment in inventory of raw material is ` 15 per kg per annum. The annual production of the
toys is 60,000 units and 5 units of toys are obtained from one kg. of raw material.
Required:
a. Calculate the EOQ of raw materials.
b. Advise, how frequently company should order to minimize its procurement cost. Assume 360 days
in a year.
c. Calculate the total ordering cost & inventory carrying cost/annum as per EOQ (May 22 – 5 Marks)
32. 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 ` 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 ` 40 per pack within a three days lead
time. The ordering and related cost is ` 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.
(May 2008 – 2+1+2+3 = 8 marks)

33. Assume that the following quantity discount schedule for a particular bearing is available to a retail
store:

Order size (unit) Discount

0- 49 0%
50- 99 5%
100 -199 10%
200 and above 12%
The cost of a single bearing with no discount is ` 30. The annual demand is 250 units. Ordering cost is
` 20 per order and annual inventory carrying cost is ` 4 per unit. Determine the optimal order
quantity and the associated minimum total cost of inventory and purchasing costs, if shortages are
not allowed.
34. An automobile company purchases 27,000 spare parts for its annual requirements. The cost per order
is 240 and annual carrying cost of average inventory is 12.5%. Each spare part cost 50. At present, the
order size is 3,000 spare parts. (Assume total number of days in a year is 360 days). Find out:
a. How much cost will be saved by opting EOQ model?
b. The reorder point under EOQ if lead time is 12 days.
c. How frequently should order for procurement be placed under EOQ model? (Nov 2020 – 10
Marks).

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 Topic 1
Material Cost
2. VARIOUS STOCK LEVELS

35. P Ltd uses 3 type of materials A, B and C for production of product X. The relevant monthly data for
consumption of materials are given below. Calculate for each material all levels:
Particulars A B C
Normal usage 200 units 150 units 180 units
Minimum usage 100 units 100 untis 90 units
Maximum usage 300 untis 250 units 270 units
Reorder quantity 750 units 900 units 720 units
Reorder period 2 to 3 months 3 to 4 months 2 to 3 months

36. From the details given below, CALCULATE:

(i) Re-ordering level
(ii) Maximum level
(iii) Minimum level
(iv) Danger level.
Re-ordering quantity is to be calculated on the basis of following information: Cost of placing a
purchase order is ` 20
Number of units to be purchased during the year is 5,000
Purchase price per unit inclusive of transportation cost is ` 50
Annual cost of storage per units is ` 5.
Details of lead time: Average- 10 days, Maximum- 15 days, Minimum- 5 days. For emergency
purchases- 4 days.
Rate of consumption: Average: 15 units per day, Maximum: 20 units per day. (SM)

37. From the details given below, CALCULATE:

(i) Re-ordering level
(ii) Maximum level
(iii) Minimum level
(iv) Danger level.
Re-ordering quantity is to be calculated on the basis of following information: Cost of placing a
purchase order is ` 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 units is ` 10.
Details of lead time: Average- 10 days, Maximum- 15 days, Minimum- 5 days. For emergency
purchases- 4 days.
Rate of consumption: Average: 1,500 units per day, Maximum: 2,000 units per day. (SM)

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 Topic 1
Material Cost
38. Calculate the various stock levels for Part K from the following information (May 96)
Particulars Amount
Quantity to be purchase 5000 units
Cost of placing an order ` 20 per order
Maximum Lead Time 15 days
Average Lead Time 10 days
Minimum Lead Time 6 days
Cost per unit ` 50 per unit
Carrying cost p.a. ` 5 per unit per annum
Normal usage 15 units per day
Maximum usage 20 units per day
39. In a company, weekly minimum and maximum consumption of material A are 25 and 75 units
respectively. The reorder quantity as fixed by the company is 300 units. The material is received
within 4 to 6 weeks from issue of supply order calculate minimum level and maximum level of
material A. (May 95)
40. Reorder quantity of material X is 5000 kg. maximum level 8000 kg. minimum usage 50 kg. per hour,
minimum reorder period 4 days, daily working hours in the factory is 8 hours. You are required to
calculate the Reorder level of material X (May 10 – 2 marks)
41. HKC required requires 1000 units of material X on an average for a week which is purchased at a
price of ` 30 per unit. The ordering cost is ` 150 per purchase order and inventory carrying cost per
unit amounts to ` 0.06 per week. The reorder period is 1 to 3 weeks and the weekly usage of
material X varies from 750 to 1250 units. Calculate EOQ, Reorder stock level, Minimum Stock Level
and Maximum stock level. (Nov 09)
42. A company manufactures 5000 units of a product per month. The cost of placing an order is ` 100.
The purchase price of the raw material is ` 10 per kg. the reorder period is 4 to 8 weeks. The
consumption of raw material varies from 100 kgs to 450 kgs per week, the average consumption
being 275 kg. the carrying cost of inventory is 20% per annum. From the above calculate EOQ,
Reorder stock level, Minimum Stock Level and Maximum stock level. (Nov 02)

43. HKC manufactures picture tube for TV. The details of their operations during the year are :
Average Monthly market demand 2000 tubes
Cost of placing an order ` 100 per order
Reorder period 6-8 weeks
Cost per unit ` 500
Carrying cost % p.a. 20%
Normal usage 100 tubes per week
Minimum usage 50 tubes per week
Maximum usage 200 tubes per week

10
 Topic 1
Material Cost
Compute:
i. EOQ
ii. Reorder Level, Maximum and Average Stock Levels
iii. If the supplier is willing to supply quarterly 1500 units at a discount of 5% is it worth
accepting? (May 98/00)
44. A company buys in lots of 6250 units which is a 3 months supply. The cost per unit is ` 2.40. Each
order costs ` 45 and inventory carrying cost is 15% of average inventory value.
i. What is total annual cost of existing inventory policy
ii. How much money could be saved by employing the EOQ
iii. If the company operates 250 days a year, procurement time is 10 days and safety stock is 500
units. What will be the reorder level, maximum level, minimum level and average inventory
level.
45. HKC manufactures a special product, which requires Z following particulars were collected for the
year:
Monthly demand of Z 7500 units
Cost of placing an order ` 500
Reorder period 5 to 8 weeks
Cost per unit ` 60
Carrying cost % p.a. 10%
Normal usage 500 units per week
Minimum usage 250 units per week
Maximum usage 750 units per week
Calculate EOQ, Reorder stock level, Minimum Stock Level and Maximum stock level, Average stock
level. (Nov 06 – 10 marks)

46. A company uses three raw materials A, B, and C for a particular product for which the following data
apply:
Raw Usage per Reorder Price Delivery period Reorder Minimum
material unit of quantity per kg Minimum Average Maximum level level
product (kg.) (kg.) (kg.)
(kg.)
A 10 10000 0.10 1 2 3 8000
B 4 5000 0.30 3 4 5 4750
C 6 10000 0.15 2 3 4 2000
Weekly production varies from 175 to 225 units, averaging 200 units of the said product. Compute
the following quantities:
i. Minimum stock of A
ii. Maximum stock of B
iii. Reorder Level of C
iv. Average stock level of A (SM)

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 Topic 1
Material Cost
47. 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 Delivery period (in weeks) Re- order Minimum
Material unit of Quantity level (Kg.) level (Kg.)
per Kg.
product Minimum Average Maximum
(Kg.) (`)
(Kg.)

A 12 12,000 12 2 3 4 60,000 ?
B 8 8,000 22 5 6 7 70,000 ?
C 6 10,000 18 3 5 7 ? 25,500
D 5 9,000 20 1 2 3 ? ?
Weekly production varies from 550 to 1,250 units, averaging 900 units of the said product.
What would be the following quantities:–
(i) Minimum Stock of A?
(ii) Maximum Stock of B?
(iii) Re-order level of C?
(iv) Average stock level of A?
(v) Re-order level of D?
(vi) Minimum Stock level of D? (RTP May 2020)

48. HKC manufactures a special product K. the following particulars are collected for the year:
Annual consumption 12000 units (360 days in year)
Cost per unit `1
Ordering cost ` 12 per order
Inventory carrying cost 24%
Normal lead time 15 days
Safety stock 30 days consumption
Required :
i. Compute Reorder Quantity and Reorder Level.
ii. What should be the inventory level (ideally) immediately before the material order is
received?(May 05)

49. HKC publishing house purchases 72000 rims of a special type paper per annum at cost ` 90 per rim.
Ordering cost per order is ` 500 and the carrying cost is 5% per year of the inventory cost. Normal
lead time is 20 days and the safety stock is Nil. Assume 300 working days in a year. Required:
i. Calculate EOQ
ii. Calculate the Reorder Inventory Level
iii. If a 1% discount is offered by the supplier for purchases in lots of 18000 rims or more, should the
publishing house accept the proposal? (Nov 08)

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 Topic 1
Material Cost
50. Primex Limited produces product 'P'. It uses annually 60,000 units of a material 'Rex' costing ` 10 per
unit. Other relevant information are:
Cost of placing an order : ` 800 per order
Carrying cost : 15% per annum of average inventory
Re-order period : 10 days
Safety stock : 600 units
The company operates 300 days in a year.
You are required to calculate:
a) Economic Order Quantity for material 'Rex'. b) Re-order Level c) Maximum Stock Level d) Average
Stock Level.

51. Following details are related to a manufacturing concern: (Nov 2014 – 5 marks)
Reorder level 160000 units

Economic order quantity 90000 units

Minimum stock level 100000 units

Maximum stock level 190000 units

Average lead time 6 days

Difference between minimum lead time and maximum lead time 4 days

Calculate
1. Maximum consumption per day
2. Minimum consumption per day
52. a) Compute E.O.Q. and the total variable cost for the following:
Annual = 5,000 units
Demand Unit = ` 20.00
price cost
Order = ` 16.00
Storage = 2% per annum
rate
Interest rate = 12% per annum
Obsolescence rate = 6% per annum
b) Determine the total cost that would result for the items if an incorrect price of ` 12.80 is used.
53. Two components, A and B are used as follows:

Normal usage 50 per week each

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

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 Topic 1
Material Cost
54. A company manufactures 5,00,000 units of a product per month. The cost of placing an order is
`1,000. The purchase price of the raw material is `50 per kg. The re-order period is 4 to 8 days. The
consumption of raw materials varies from 14,000 kg to 18,000 kg per day, the average consumption
being 16,000 kg. The carrying cost of inventory is 20% per annum.
You are required to CALCULATE

(i) Re-order quantity (ii) Re-order level

(iii) Maximum level (iv) Minimum level
(v) Average stock level
55. 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 ` 250 per pack.
For the month of April 2018, it has been anticipated that a demand for 60,000 packs of surgical gloves
will arise. Aditya Brothers purchases these gloves from the manufacturer at ` 228 per pack within a 4
to 6 days lead time. The ordering and related cost is ` 240 per order. The storage cost is 10% p.a. of
average inventory investment. Required:
a. CALCULATE the Economic Order Quantity (EOQ)
b. CALCULATE the number of orders needed every year
c. CALCULATE the total cost of ordering and storage of the surgical gloves.
d. DETERMINE when should the next order to be placed. (Assuming that the company does not
maintain a safety stock and that the present inventory level is 10,033 packs with a year of 360
working days).

56. 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 20X8:
Average monthly market demand 2,000 Monitors

Ordering cost ` 1,000 per order

Inventory carrying cost 20% per annum
Cost of Part ` 350 per part
Normal usage 425 parts per week
Minimum usage 140 parts per week
Maximum usage 710 parts per week
Lead time to supply 3-5 weeks

COMPUTE from the above:

a. Economic Order Quantity (EOQ). If the supplier is willing to supply quarterly 30,000 units of Part-
M at a discount of 5%, is it worth accepting?
b. Reorder level
c. Maximum level of stock
d. Minimum level of stock.

14
 Topic 1
Material Cost
57. Ananya Ltd. produces a product ‘Exe’ using a raw material Dee. To produce one unit of Exe, 2 kg of
Dee is required. As per the sales forecast conducted by the company, it will able to sale 10,000 units of
Exe in the coming year. The following is the information regarding the raw material Dee:
a. The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).
b. Maximum consumption per day is 20 kg. more than the average consumption per day.
c. There is an opening stock of 1,000 kg.
d. Time required to get the raw materials from the suppliers is 4 to 8 days.
e. The purchase price is `125 per kg.
There is an opening stock of 900 units of the finished product Exe. The rate of interest charged by
bank on Cash Credit facility is 13.76%.
To place an order company has to incur ` 720 on paper and documentation work. From the above
information FIND OUT the followings in relation to raw material Dee:
(a) Re-order Quantity
(b) Maximum Stock level
(c) Minimum Stock level
(d) CALCULATE the impact on the profitability of the company by not ordering the EOQ. [Take 364
days for a year] (Mock Test Paper 2 May 19)

58. 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, 2018:

Annual demand of "SKY BLUE" 12000 Units

Cost of placing an order ` 1,800
Cost per unit of "SKY BLUE ` 640
Carrying cost per annum 18.75%

The company has been offered a quantity discount of 5% on the purchases of "SKY BLUE" provided the
order size is 3000 components at a time. You are required to:

(i) Compute the Economic Order Quantity.

(ii) Advise whether the quantity discount offer can be accepted.

15
 Topic 1
Material Cost
3. QUESTIONS ON STOCK OUT COSTS

59. Experience of CP Ltd of being stock out situation is as follows:

Stock out(no of units) No of times
500 2
400 4
250 6
100 8
50 20
0 160
Total 200
Stock out cost is ` 40 per unit. Carrying cost per unit per annum ` 20. Determine optimum safety
stock is to be maintained.
60. The following information is available relating to the stock out of firm :
Stock out ( units) No of times Probability
800 2 0.04
600 3 0.06
400 5 0.10
200 10 0.20
0 30 0.60
Total 50 1.00

The selling price of each unit is ` 200. The carrying cost is ` 19/unit. The stock out cost is ` 50/unit.
i. If the firm wishes to never miss a sale, what should be the safety stock?what is the total cost
associated with this level of safety stock ? what are the associated costs with safety stock of 600,
400, 200 and 0 units respectively.
ii. What is the optimal safety stock level?

61. M/s Tyro tubes 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 Tyro tubes
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

16
 Topic 1
Material Cost

M/s Tyro tubes loses ` 150 per unit due to stock-out and spends ` 50 per unit on carrying of
inventory.
DETERMINE optimum safest stock level

62. DC Ltd distributes a wide range of water purifier system, one of its best selling items is a standard
water purifier. The management of DC ltd used the EOQ decision model to determine optimal
number of standard water purifiers to order. Management now wants to determine how much
safety stock to hold.
DC Ltd estimates annual demand (360 working days) to be 36,000 standard water purifiers. Using the
EOQ decision model, the company orders 3,600 standard water purifiers at a time. The lead time for
and order is 6 days. The annual carrying cost of one standard water purifier is ` 450. Management
has also estimated the additional stock out costs would be ` 900 for shortage of each standard water
purifier. DC ltd has analysed the demand during 200 past reorder periods. The records indicate the
following patterns:

Demand during lead time Number of times quantity was demanded

540 6
560 12
580 16
600 130
620 20
640 10
660 6
Total 200
i. Determine the level of safety stock for standard water purifier that the DC ltd should maintain in
order to minimize expected stock out costs and carrying costs. While computing carrying costs,
assume that the safety stock is on hand at all times and that there is no overstocking caused by
decrease in expected demand (consider safety stock levels of 0, 20, 40 and 60 units)
ii. What would be the DC ltds new reorder point
iii. What factors DC ltd should have considered in estimating stock out costs?

63. The following information is given to you-

Daily usage Probability Lead time Probability
2 tons 20% 25 days 20%
3 tons 60% 35 days 50%
4 tons 20% 45 days 30%

The company’s carrying cost of inventory is ` 2000 per ton whereas the stock out cost are estimated
at ` 8000 per ton. Calculate the optimum level of stock that should be held by the company.

17
 Topic 1
Material Cost

64. HKC ltd. Uses small casting in one of its finished products. The castings are purchased from a foundry.
HKC purchases 54000 castings per year at a cost of ` 800 per casting.
The casting are used evenly throughout the year in the production process on a 360 day per year
basis. The company estimates that it costs ` 9000 to place a single purchase order and about ` 300 to
carry one casting in inventory for a year. The high carrying costs result from the need to keep the
castings in carefully controlled temperature and humidity conditions, and from the high cost of
insurance.
Delivery from the foundry generally takes 6 days, but it can take as much as 10 days. The days of
delivery time and percentage of their occurrences 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 reorder point?
iii. Assume the company is willing to assume a 5% risk of being out of stock. What would be the
safety stock? Reorder point?
iv. Assume 5% stock out risk. What would be the total cost of ordering and carrying inventory for
one year?
v. Refer to the original data. Assume that using process reengineering the company reduces its cost
of placing a purchase order to only ` 600. In addition, company estimates that when the waste
and inefficiency caused by inventories are considered, the true cost of carrying a unit in stock is `
720 per year.
a. Compute the new EOQ
b. How frequently would the company be placing an order, as compared to the old purchasing
policy? (SM)

18
 Topic 1
Material Cost
4. Landed cost of material
65. At what price per unit would part no 8181 be entered in the stores ledger, if the following invoice
was received from a supplier:
Invoice Amount
200 units part number 8181 @ ` 5 1000
Less : discount 20% 200
800
Add : SGST @ 12% 96
896
Add : Packing charges (5 non-returnable boxes) 50
946
Note :
i. 2% discount will be given for payment in 30 days.
ii. Documents substantiating payment of GST is enclosed fro claiming credit.(SM)

66. The particulars relating to the import off mobile phone made by HKC Ltd during January are given as
below
a. Mobile price : 1,000 pieces invoiced @ $2.00 CIF Goa port
b. Customs duty was paid @ 100% on invoice value ( which was converted to Indian currency by
adopting an exchange rate of ` 40 per $
c. Clearing charges ` 1,800 for the entire consignment and
d. Freight charges ` 1,400 for transporting the consignment from Goa port to factory premises.

It was found on inspection that 100 pieces of the above material were broken and therefore,
rejected. There is no scrap value for the rejected part. No refund for the broken material would be
admissible as per the terms of contract. The management decided to treat 40 pieces as normal loss
and the rest 60 pieces as abnormal loss. The entire quantity of 900 pieces was issued to production.

Calculate:
1. The total cost of material
2. Unit cost of material issued to production, State briefly how the value of 100 pieces, rejected in
inspection will be treated in cost.
67. A manufacturer organization has imported four types of materials. The invoice reveals the following
data
Material Quantity Rate
Kgs US $ per Kg
A 1,000 1.50
B 2,000 1.25
C 1,500 2.00
D 3,000 1.00

19
 Topic 1
Material Cost
i. Import duty 23% of invoice value
ii. Insurance 2% of invoice value
iii. Freight and clearing ` 30,000
iv. Exchange rate U.S. $ 1 = ` 16
v. 50% of materials imported are issued to production centres. While determining value of closing
stock 10% allowance is provided to cover up storage loss.
Determine the value of closing stock of each type of materials.

68. An invoice in respect of a consignment of chemicals A and B provides the following information :
Particulars (`)
Chemical A: 10,000 kgs. at ` 10 per kg. 1,00,000
Chemical B: 8,000 kgs. at ` 13 per kg. 1,04,000
Basic custom duty @ 10% (Credit is not allowed) 20,400
Railway freight 3,840
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. (SM)
69. SKD Company Ltd., not registered under GST, purchased material P from a company which is
registered under GST. The following information is available for the one lot of 1,000 units of
material purchased:
Listed price of one lot ` 50,000
Trade discount @ 10% on Listed price
CGST and SGST (Credit Not available) 12% (6% CGST + 6% SGST)
Cash discount @10%
(Will be given only if payment is made within 30 days.)
Freight and Insurance ` 3,400
Toll Tax paid ` 1,000
Demurrage ` 1,000
Commission and brokerage on purchases `2,000
Amount deposited for returnable containers `6,000
Amount of refund on returning the container ` 4,000
Other Expenses @ 2% of total cost
20% of material shortage is due to normal reasons.
The payment to the supplier was made within 20 days of the purchases.
You are required to calculate cost per unit of material purchased to SKD Company Ltd.
(SM/Similar sum in RTP May 22)

20
 Topic 1
Material Cost
5. VALUATION OF INVENTORY (FIFO, LIFO, AVERAGE, WEIGHTED AVERAGE METHOD)

70. Following information regarding material D is provided by HKC:(May 89)

Date of April Particulars
1 Opening stock 100 units at ` 5 per unit
5 Purchases 300 units at ` 5 per unit
6 Issue 250 units
8 purchases 500 units at ` 7 per unit
10 issue 400 units
12 purchases 600 units at ` 8 per unit
14 issue 500 units
Required: prepare stores ledger using LIFO method of pricing issue. Also compute cost of materials
consumed.

71. Prepare a stores ledger account from the following transactions in April of XY company Ltd:

Date of April Particulars

1 Opening stock 200 units at ` 10 per unit
5 Receipt 250 units costing ` 2000
8 Receipt 150 units costing ` 1275
10 Issue 100 units
15 Receipt 50 units costing ` 500
20 Shortage 10 units
21 Receipt 60 units costing ` 540
22 Issue 400 units
Issues up to 10th April will be priced at LIFO and from 11th April, issues will be priced at FIFO.
Shortage will be charged as OH. (May 11 - 5 marks)
72. The following are the details of receipts and issues of a material of stores in a manufacturing
company for the period of 3 months ending 30th June:
Receipts Issues
Date Quantity (kgs) Rate per Kg Date Quantity (kgs)
10 April 1600 5.00 4 April 1100
20 April 2400 4.90 24 April 1600
5 May 1000 5.10 10 May 1500
17 May 1100 5.20 26 May 1700
25 May 800 5.25 15 June 1500
11 June 900 5.40 21 June 1200
24 June 1400 5.50

21
 Topic 1
Material Cost

There was 1500 kgs in stock at 1st April, which was valued at ` 4.80 per kg.
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 and 60 kgs on 30thjune. The shortage is treated as
inflating the price of remaining material on account of shortage. You are required to prepare a stores
ledger account. (Nov 08)
73. The following transactions in respect of material Y occurred during the six months ended 30th June,
2014:

Month Purchase (units) Price per unit (`) 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

The chief accountant argues that the value of closing stock remains the same nomatter which method
of pricing of material issues is used. Do you agree? Why or why not? Detailed stores ledgers are not
required. (SM)

74. ‘AT’ Ltd. furnishes the following store transactions for Septem¬ber, 20X1:
1-9-X1 Opening balance 25 units value ` 162.50
4-9-X1 Issues Req. No. 85 8 units
6-9-X1 Receipts from B & Co. GRN No. 26 50 units @ ` 5.75 per unit
7-9-X1 Issues Req. No. 97 12 units
10-9-X1 Return to B & Co. 10 units
12-9-X1 Issues Req. No. 108 15 units
13-9-X1 Issues Req. No. 110 20 units
15-9-X1 Receipts from M & Co. GRN. No. 33 25 units @ ` 6.10 per unit
17-9-X1 Issues Req. No. 121 10 units
19-9-X1 Received replacement from B & Co. GRN No. 38 10 units
20-9-X1 Returned from department, material of M & Co. MRR No. 4 5 units
22-9-X1 Transfer from Job 182 to Job 187 in the dept. MTR 6 5 units
26-9-X1 Issues Req. No. 146 10 units
29-9-X1 Transfer from Dept. “A” to Dept. “B” MTR 10 5 units
30-9-X1 Shortage in stock taking 2 units
Write up the priced stores ledger on FIFO method and discuss how you would treat the shortage in
stock taking. (SM)

22
 Topic 1
Material Cost
75. Arnav Electronics manufactures electronic home appliances. It follows weighted average Cost
method for inventory valuation. Following are the data of component X

Date Particulars Units Rate per unit (`)

15-12-19 Purchase Order- 008 10,000 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 -
13-01-20 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:
a) Re-order level
b) Maximum stock level
c) Minimum stock level
d) PREPARE Store Ledger for the period January 2020 and DETERMINE the value of stock as on 31-
01-2020.
e) Value of components used during the month of January, 2020.
f) Inventory turnover ratio. (RTP May 2020)

76. Imbrios India Ltd. is recently incorporated start-up company back in the year 2019. It is engaged in
creating Embedded products and Internet of Things (IoT) solutions for the Industrial market. It is
focused on innovation, design, research and development of products and services. One of its
embedded products is LogMax, a system on module (SoM) Carrier board for industrial use. It is a
small, flexible and embedded computer designed as per industry specifications. In the beginning of
the month of September 2021, company entered into a job agreement of providing 4800 LogMax to
NIT, Mandi. Following details w.r.t. issues, receipts, returns of Store Department handling Micro-
controller, a component used in the designated assembling process have been extracted for the
month of September, 2021:

23
Topic 1
Material Cost
Sep. 1 Opening stock of 6,000 units @ ` 285 per unit
Issued 4875 units to mechanical division vide material requisition no. Mech 009/20
Sep. 8

Received 17,500 units @ ` 276 per unit vide purchase order no. 159/2020
Sep. 9

Issued 12,000 units to technical division vide material requisition no. Tech 012/20
Sep. 10

Returned to stores 2375 units by technical division against material requisition no. Tech
Sep. 12
012/20.
Received 9,000 units @ ` 288 per units vide purchase order no. 160/ 2020
Sep. 15

Returned to supplier 700 units out of quantity received vide purchase order no.
Sep. 17
160/2020.
Issued 9,500 units to technical division vide material requisition no. Tech 165/20
Sep. 20

On 25th September, 2021, the stock manager of the company expressed his need to leave for his
hometown due to certain contingency and immediately left the job same day. Later, he also switched
his phone off.
As the company has the tendency of stock-taking every end of the month to check and report for the
loss due to rusting of the components, the new stock manager, on 30th September, 2021, found that
900 units of Micro-controllers were missing which was apparently misappropriated by the former
stock manager. He, further, reported loss of 300 units due to rusting of the components.
From the above information you are REQUIRED to prepare the Stock Ledger account using ‘Weighted
Average’ method of valuing the issues. (SM)

24
 Topic 1
Material Cost
6. INVENTORY TURNOVER RATIOS

77. The following data are available in respect of material X for the year just ended- opening stock `
90,000, purchases during the year ` 2,70,000, closing stock ` 1,10,000. Calculate inventory turnover
ratio and number of days for which the average inventory is held. (Nov 97/SM)

78. The inventory records of HKC for the year 1998 show the following figures:

Particulars Opening stock Purchases Closing stock

Material A 700 kg 11500 kg 200 kg
Material B 200 liter 11000 liter 1200 liter
Material C 1000 kg 1800 kg 1200 kg
The inventory is valued at ` 1 per kg or litre.
Calculate the material turnover ratios regarding each of these materials and express in number of days
the average inventory held. What inference do you draw.

79. From the following data for the year ended 31st March, 2020, CALCULATE the inventory turnover ratio
of the two items and put forward your comments on them
Particulars Material A (`) Material B (`)
Opening stock 1.04.2019 10,000 9,000
Purchase during the year 52,000 27,000
Closing stock 31.03.2020 6,000 11,000
(SM)

7. TREATMENT OF LOSSES

80. 1000 units of material are purchased at ` 1.80/unit. Normal loss is 10%. Actual loss is a: 100 units, b:
150 units, c: 80 units. What is the treatment of the losses.

81. After the annual stocktaking, you come to know of some significant discrepancies between book
stock and physical stock. You gather the following information

Item Stock card Stores Ledger Physical check Cost per unit
(units) (units) (units)
A 600 600 560 ` 60
B 380 380 385 ` 40
C 750 780 720 ` 10

Required:
a. What action should be taken to record the information shown above?
b. Suggest reasons for the shortage and discrepancies disclosed above and recommend a possible
course of action by management to prevent future losses.

25
 Topic 1
Material Cost

8. ABC ANALYSIS

82. From the following details, draw a plan of ABC selective control-
Item Units Unit cost `
1 7000 5.00
2 24000 3.00
3 1500 10.00
4 600 22.00
5 38000 1.50
6 40000 0.50
7 60000 0.20
8 3000 3.50
9 300 8.00
10 29000 0.40
11 11500 7.10
12 4100 6.20
(SM)

83. From the following information classify the inventory items into A, B and C categories:

Item Units Unit cost `

A 200 501
B 600 83
C 250 250
D 470 50
E 250 64
F 300 85
G 400 25
H 280 400
I 400 55
J 300 40
K 250 30
L 1000 15

26
 Topic 1
Material Cost

84. A factory uses 4,000 varieties of inventory. In terms of inventory holding and inventory usage, the
following information is compiled:

No. of varieties of % % value of inventory % of inventory usage (in end-

inventory holding (average) 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. (SM)

85. MM Ltd. has provided the following information about the items in its inventory.

Item Code Number Units Unit Cost (`)

101 25 50
102 300 01
103 50 80
104 75 08
105 225 02
106 75 12

MM Ltd. has adopted the policy of classifying the items constituting 15% or above of Total Inventory
Cost as 'A' category, items constituting 6% or less of Total Inventory Cost as 'C' category and the
remaining items as 'B' category.
You are required to:

(i) Rank the items on the basis of % of Total Inventory Cost.

(ii) Classify the items into A, B and C categories as per ABC Analysis of Inventory Control adopted by
MM Ltd. (July 21 – 5 Marks)

27
 Topic 1
Material Cost

9. OTHER MISCELANEOUS SUMS

86. DC ltd. currently has two sources of supply for a component. With an eye on reducing investment in
working capital by minimizing outlay on materials for a given output, a study on the comparative
economics of the two sources is undertaken. The component is bought in lots of 500 numbers.
Source A gives an assurance that the defectives will not exceed 1% of the quantity supplied. Source B
does not offer any such guarantee but supplies each lot at a price which is lower by ` 40 as compared
to source A. The past experience on defectives from source B has been

Percentage defective Probability

1 0.20
5 0.30
10 0.50

Normally the defective components can be reworked and brought to specification at a cost of ` 5
each. Examine the comparative cost implications and recommend the more economical source.

87. Bajaj ltd has the option to procure a particular material from two sources :
Source I assures that defectives will not be more than 2% of supplied quantity
Source II does not give any assurance, but on the basis of past experience of supplies received from
it, it is observed that defective percentage is 2.8%. The material is supplied in lots of 1000 units.
Source II supplies the lot at a price, which is lower by ` 100 as compared to source I. the defective
units of material can be rectified for use at a cost of ` 5 per unit.
You are required to find out which of the two sources is more economical.

88. A 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 are 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. (Mock Test Paper Nov 19)

28