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Cost Accounting - 1

TRANSPORTATION
Transportation deals with transfer of goods from producer to seller. The objective is to minimized total cost, total transport cost & time, at the same time total demand must be fulfilled and total supply must be used. The rules are :1. 2. 3. 4. Prepare a balance problem .(note 1) prepare and initial allotment .(note2) check the feasibility.(note 3) optimality test

Note-1: Problems are of 2 types : 1. Balanced problem i.e. demand = supply 2. Unbalanced problem, i.e. demand # supply. If it is an unbalanced problem, say demand > supply a dummy supply row is to be introduced with a production capacity equal to the difference of demand & supply and having no transportation cost in any of the cell of that column. If supply > demand , introduce a dummy column etc. etc. Note-2: Prepare an initial solution by any of the following three methods ( prefer VAM) A. North-West Corner Rule : Allocate maximum possible quantity ( minimum of demand or supply or MPQ ) to North-West corner among the empty cell. Select next N-W among empty cell & repeat the process till all quantities are allotted. B. Least Cost Method : Allocate maximum possible quantity to the lowest cost empty cell .Incase of tie for lowest cost , select that cell where maximum quantity can be allotted .If there is a tie , select any one empty cell . Re-calculate the demand & supply quantity of the corresponding row & column. If demand or supply is fulfilled then put dash in the other empty cells of that row or column. Repeat the process till all quantities are alloted. C. Vogels Approximation Method ( VAM ) : 1. Calculate penalty for each row and column separately, where penalty = 2nd lowest cost - lowest cost, among the empty cell In case same lowest cost in two empty cells , penalty = 0. Select highest penalty row or column Allocate maximum possible quantity to the lowest cost empty cell in that row or column. Re-calculate the supply & demand of the corresponding row & column. Compute the penalty for each row and column. Select the highest penalty etc.,etc. In case of tie in penalty, select lowest cost empty cell , If there is a tie also, select that empty cell where highest qty. can be allotted. If that is a tie, apply rule of thumb.

2.

3.

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Cost Accounting - 2

Note-3 : Check the feasibility of the above solution : no. of occupied cells m + n - 1, where m = no. of rows, n = no. of columns If it is not feasible , allocate a very small qty. unoccupied cell. to the lowest cost among

In case of tie in lowest cost unoccupied cell ,check the cost evaluation or loop of the corresponding tie cell. put in such a way so that negative cost evaluation can be avoided. Note-4: Test for optimal solution by either of the following methods : A. Stepping Stone Method Rule: (1) Calculate cost of transferring one unit to each unoccupied cell ( known as cost evaluation ) with the help of the loops through the occupied cell . (2) If all the cost evaluations are +ve or zero, then optimal solution is reached, although the zero cost evaluation cells signifies to alternative solution ( only in the final table. ) (3) If the cost evaluations are -ve then select highest -ve cost. Prepare the loop for that un-occupied cell. Find is the lowest qty. among the - marked cell. Add this min. quantity to the + marked cell and subtract the same from the - marked cell. In case of tie in - cost evaluation , select that unoccupied cell where maximum qty. can be transferred. If that is a tie also apply rule of thumb. (4) Prepare a new table and evaluate the cost of the unoccupied cells again. B. Modified Distribution Method. (MODI) or Algebra method Prepare the cost equation for the occupied cells & then find the cost evaluation of the unoccupied cells. Transfer maximum possible units to the highest negative cost evaluation cell, etc. etc. Note 5: In case of profit maximisation problem Calculate profit for each cell where Profit = ( S. P. - Production cost - transport cost) on per unit basis. Subtract the profit of each occupied cell from the highest profit p.u. , The result is the cost matrix. Now solve the problem by the previous transportation rule.

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Cost Accounting - 3

PROBLEMS 1. An oil corporation has got three refineries P, Q, and R and it has to send petrol to four different depots A, B, C and D. The cost of shipping 1 gallon of petrol from each refinery to each depot is given below. The requirements of the depots and the available petrol at the refineries are also given. Find the minimum cost of shipping: Refinery P Q R Required 2. A 10 14 20 90 B 12 11 5 100 Depot C 15 9 7 140 Available D 8 10 18 120 130 150 170

A company manufacturers a product in three of its factories situated at stations A, B, and C The production is transferred to meet the demand in five warehouses. The supply and demand as well as the cost of transportation from the factories to ware house in rupees per unit of product are given in the table below : Factories A B C Demand 1 40 38 36 160 Warehouse 2 36 28 38 160 3 26 34 24 200 4 38 34 28 120 5 30 198 30 240 Supply 160 280 240

You are required to prepare a schedule for transportation of the production form the factories to warehouses and determine the total minimum transportation cost. 12-02-6A 3. Consider a transportation problem with m = 3 and n = 4, where : c11 = 2 c12 = 3 c13 = 11 c21 = 1, c22 = 0, c23 = 6 c31 = 5 c32 = 8 c33 = 15, c14 = 7 c24 = 1 c34 = 9

Suppose S1 =30 , S2 = 30 and S3 = 20 whereas D1 = 25, D2 = 20, D3 = 15, and D4 = 20 . Apply the transportation simplex method to find an optimal solution. 3. Priyanshu enterprise has three factories at locations A, B and C which supplies three warehouses located at D. E and F. Monthly factory capacities are 10, 80 and 15 units respectively. Monthly warehouse requirements are 75, 20 and 50 units respectively. Unit shipping costs (in Rs.) are given below : Factory A B C D 5 6 3 Warehouse E 1 4 2 F 7 6 5

The penalty costs for not satisfying demand at the warehouse D, E and F are Rs. 5, Rs. 3 and Rs. 2 per unit respectively. Determine the optimal distribution for Priyanshu, using any of the known algorithms.

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Cost Accounting - 4

4.

A company has three factories (F) from which it transports the product to four warehouses (W) The unit cost of production at the three factories are Rs. 4, 3, 5 respectively. Given the following information on unit costs of transportation, capacities at the three factories and o the requirement at the four warehouses, find the optimum allocation. Factory F1 F2 F3 Requirements Unit cost of production Rs./unit 4 3 5 Transportation cost, Rs./unit. --------------------------------------------------------------W1 W2 W3 W4 5 7 3 8 4 6 9 5 2 6 4 5 200 300 450 100 Capacity 300 500 200

5.

The Bombay Transport Company has trucks available at four different sites in the following number : State A --5 trucks, Site B -- 10 trucks, Site C -- 7 trucks, Site D - 3 trucks Customers W, X and Y require trucks as shown : Customer W - 5 trucks, customer X -- 8 trucks, Customer Y -- 10 trucks Variable costs getting trucks to the customers are : From A to W -- Rs. 7, to X -- Rs. 3, to Y -- Rs. 6 From B to W -- Rs. 4, to X -- Rs. 6, to Y -- Rs. 8 From C to W -- Rs. 5, to X -- Rs. 8, to Y -- Rs. 4 From D to W -- Rs. 8, to X -- Rs. 4, to Y -- Rs. 3 Solve the above transportation problem.

Investment maximising decision 6. A company has four factories F1, F2, F3 and F4 manufacturing the same, product. Production and raw material costs differ from factory to factory and are given in the following table in the first two rows. The transportation costs from the factories to sales depots, S1, S2, S3, are also given. The last two columns in the table give the sales price and the total requirement at each depot. The production capacity of each factory is given in the last row. F1 Production cost/unit Raw material cost/unit 15 10 F2 18 9 F3 14 12 F4 13 9 Sales price per unit Requirement

Transportation Cost per unit S1 3 9 5 4 S2 1 7 4 5 S3 5 8 3 6 capacity 10 150 50 100

34 32 31

80 120 150

Determine the most profitable production and distribution schedule and the corresponding profit. The surplus production should be taken to yield zero profit. Find the amount of profit if 10 units are to be allotted to S1F1 cell? 7. A company wishes to determine an investment strategy for each of the next four years . Five investment types have been selected, investment capital has been allocated for each of the coming four years, and maximum investment levels have been established for each investment type. An assumption is that amounts invested in any year will remain invested until the end of the planning horizon of four years.

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Cost Accounting - 5

The following table summaries the data for this problem. The values in the body of the table represent net return on investment one rupee up to the end of the planning horizon. For example, a Rupee invested in investment type B at the beginning of year 1 will grow to Rs. 1.90 by the end of the fourth year, yielding a net return of Rs. 0.90. -----------------------------------------------------------------------------------------------------------------------------Investment made Investment Type Rupees at the beginning A B C D E available of year (in 000s)
NET RETURN DATA

1 2 3 4

0.80 0.55 0.30 0.15

0.90 0.65 0.25 0.12 600

0.60 0.40 0.30 0.25 500

0.75 0.60 0.50 0.35 800

1.00 0.50 0.20 0.10 1,000

500 600 750 800

Maximum Rupee Investment (in 000s) 750

The objective in this problem is to determine the amount to be invested at the beginning of each year in an investment type so as to maximise the net rupee return for the four year period. Also calculate the NPV at 10% cost of cap. Solve the above transportation problem and get an optimal solution. Also calculate the net return on investment for the planning horizon of four year period. Decision making with transportation 8. The Agri-Products Company has two factories, at Tiruchi and Meerut. There are four major warehouses to which the finished products are sent : at Guwahati, Nagpur, Ahmedabad and Chandigarh. The Company plans to locate an additional factory at either Indore or at Kanpur. If the following matrix gives the details of the shipping costs, manufacturing capacities and warehouse requirements, how would you go about choosing between the two proposed locations, i.e. Indore and Kanpur. Suggest an approach. Place Tiruchi Meerut Indore Kanpur Units Required Guwahati 25 10 15 9 100 Shipping Costs Rs. per Unit Nagpur Ahmedabad Chandigarh 9 10 20 8 6 5 2 4 10 7 7 5 150 300 250 Capacity 220 380 200 200

Transportation with overtime & storing cost 9. Consider the problem of scheduling the weekly production of certain items for the next 4 weeks. The production cost of the item is Rs. 10 for the first two weeks and Rs. 15 for the last 2 weeks. The weekly demands are 300, 700, 900 and 800, which must be met. The plant can produce a maximum of 700 units per week. In addition, the company can employ overtime during the second and third week. This increases the weekly production by an additional 200 units, but the production cost increases by Rs. 5 Excess production can be stored at a unit cost of Rs. 3 per week. How should the production be scheduled so as to minimise the total cost ?

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Cost Accounting - 6

Transportation with distance 10. Two chemical plants located at A and B have stocks of 2000 and 1900 tonnes of a chemical . At D and E there are demands of 1500 and 1700 tonnes respectively. The distances between the points are shown in the figure. Assume transport cost per tonne to be proportional to the distance. Is it optimal (in minimizing total transport cost) in send 1500 tones from A to D, 500 tonnes from A to E and 1200 tonnes from B to E ? A 600 KM 300 KM E 750 KM Transshipment Problem 11. A firm having two sources S1 and S2 wishes to ship its products to two destinations D1 and D2. The number of units available at S1 and S2 are 5 and 25 respectively and the product demanded at D1 and D2 are 20 and 10 units respectively. The firm, instead of shipping directly from sources to destinations decides to investigate the possibility of trans-shipment. The unit transportation costs (in rupees) are given in the following table. Find the optimal shipping schedule : Source Destination Available S1 S2 D1 D2 S1 0 2 : 3 4 5 Source S2 2 0 : 2 4 25 Destination D1 D2 3 4 2 4 -: : -0 1 1 0 20 --10 D 320 KM B

Demand