Inventory Valuation – Problems

Problem 1 (No Opening stock)

A company had the following transactions with respect to purchases and
issues of materials of Item A.
Date Type Quantity Rate
(Rs p.u.)
1st Feb ‘19 Purchase 1,000 units 12
4th Feb ‘19 Purchase 500 units 13
8th Feb ‘19 Issue 800 units ??
10th Feb ‘19 Issue 650 units ??
13th Feb ‘19 Purchase 2,000 units 12.75
15th Feb ‘19 Issue 1,800 units ??
20th Feb ’19 Purchase 1,000 units 13.25
23rd Feb ‘19 Issue 1,100 units ??
26th Feb ‘19 Purchase 800 units 13.75
28th Feb ‘19 Issue 900 units ??

a) Determine the value of closing stock as on 28 th Feb 2019 if the

company chooses the FIFO method of inventory valuation. Also
determine the cost of materials charged to production.
b) Compare the above numbers if the company were to switch over
to the Weighted Average Cost method of inventory valuation.

Problem 2 (With opening stock)

Date Type Quantity Rate
(Rs p.u.)
1st Jun ‘18 Opening 1000 kgs **
Stock
3rd Jun ‘18 Issues 780 kgs ??
4th Jun ‘18 Purchase 820 kgs 96.20
6th Jun ‘18 Issues 645 kgs ??
7th Jun ‘18 Issues 345 kgs ??
8th Jun ‘18 Purchase 640 kgs 97.40
12th Jun ‘18 Issue 300 kgs ??
15th Jun ‘18 Purchase 250 kgs 98.20
20th Jun ‘18 Purchase 330 kgs 99.40
 Date Type Quantity Rate
(Rs p.u.)
24th Jun ‘18 Issue 470 kgs ??
27th Jun ‘18 Issue 330 kgs ??
20th Jun ‘18 Purchase 225 kgs 96.20

** - Opening stock of 1000 kgs consists of the following:

a) 600 kgs bought on 29th May 2018 @ Rs 100 per kg
b) 400 kgs bought on 30th May 2018 @ Rs 101.50 per kg
Determine the value of issues as well as closing stock as per the 3
methods – FIFO, LIFO and Weighted Average

Some formulae for Costs under EOQ

Ordering Cost = No. of orders * Ordering cost per order
Carrying cost = Average Inventory * Carrying cost per unit
Carrying cost per unit = Purchase price of item * Holding cost % on
purchase price

Problem 3
N Ltd’s chief executive believes the company is holding excessive stocks
and has asked for the management accountant to carry out an
investigation.
Information on the two stock items is given below:

The company’s stock ordering policy is based on the economic order

quantity (EOQ).
Required for both Items G and H:
(a) Number of orders per year
(b) Ordering Cost
 (c) Annual holding cost
Solution
EOQ = Sq. root(2AB/C)
Item G Item H
A 15000 2800
B 80 28
C 200*13.33%= 26.66 25*8%=2
For G, EOQ = sqrt (2*15000*80/26.66) = 300.0375 units (rounded to 300
units)
No. of orders = 15000/300 = 50
Ordering cost = 50*80 = $4,000
Holding Cost = 300 /2 *26.66 = $4,000

For H, EOQ = sqrt (2*2800*28/2) = 280 units

No. of orders = 2800 /280 = 10
Ordering cost = 10*28 = $280
Carrying Cost = 280/2*2 = $280

Problem 4
BB manufactures a range of electronic products. The supplier of
component Y has informed BB that it will offer a quantity discount of 1.0
per cent if BB places an order of 10 000 components or more at any one
time.
Details of component Y are as follows:
Cost per component before discount $2.00
Annual purchases 150 000 components
Ordering costs $360 per order
Holding costs $3.00 per component p.a.
Required:
(i) Calculate the total annual cost of holding and ordering inventory of
component Y using the economic order quantity and ignoring the
quantity discount.
(ii) Calculate whether there is a financial benefit to BB from increasing
the order size to 10 000 components in order to quality for the 1.0 per
cent quantity discount.
Solution
i)
EOQ = Sq. root(2AB/C)
= sqrt (2*150000*360/3) = 6000
Total Cost = Ordering Cost + Carrying cost
Ordering cost = 150000/6000 *360 = 25*360 = $9,000
Carrying cost = 6000/2*3 = $9,000
Total Cost = $18,000
ii)
Order size = 10,000 units
No. of orders = 150000/10000=15
Ordering Cost = 15*360 = $5,400
Carrying cost = 10000/2*3= $15,000
Discount = Annual purchase quantity * Cost per unit * Discount
Discount = 150000*2*1%= 3000
Net Costs = 5400 +15000 -3000 = 17,400
Comparing the costs under both the scenarios,
Cost under EOQ= $18,000
Cost under bulk buying = $17,400

Problem 5
CD World is an independent electronics store that sells blank compact
disks. CD World purchases the CDs from Sontek at $14 a package
(each package contains 20 disks). Sontek pays for all incoming freight.
No inspection is necessary at CD World because Sontek supplies quality
merchandise. CD World’s annual demand is 13,000 packages, at a rate
of 250 packages per week.CD World requires a 15% annual rate of
return on investment. The purchase-order lead time is two weeks.
Relevant ordering cost per purchase order is $200.
Relevant carrying cost per package per year is as follows:
Required annual return on investment = 15% * $14 = $2.10
Relevant costs of insurance, materials handling, breakage, shrinkage,
and so on, per year is $3.10
Total = $2.10 + $3.10 = $5.20
What is the EOQ of packages of disks?

Solution
EOQ = Sq. root(2AB/C)
A = 13000;
B= $200 per order
C = $5.20 per unit
EOQ = sqrt (2*13000*200/5.2) = 1000 units
Purchasing 1,000 packages per order minimizes total relevant ordering
and carrying costs. Therefore, the number of deliveries each period (one
year in this example) is as follows:
= A / EOQ = 13,000 / 1000 = 13 orders or deliveries
Ordering cost = No. of orders * Ordering cost
= 13*200 = $2,600

Carrying Cost = Average inventory * Carrying cost

= 1000 /2 * 5.2 = $2,600
Total Cost = Ordering cost + Carrying cost
= 2,600 + 2,600 = $5,200
Problem 6
Fan Base (FB) operates a megastore featuring sports merchandise. It
uses an EOQ decision model to make inventory decisions. It is now
considering inventory decisions for its Los Angeles Galaxy soccer
jerseys product line. This is a highly popular item. Data for 2011 are as
follows:
Expected annual demand for Galaxy jerseys 10,000
Ordering cost per purchase order $200
Carrying cost per year $7 per jersey

Each jersey costs FB $40 and sells for $80. The $7 carrying cost per
jersey per year comprises the required return on investment of $4.80
(12% $40 purchase price) plus $2.20 in relevant insurance, handling,
and theft-related costs. The purchasing lead time is 7 days. FB is open
365 days a year.
Required
1. Calculate the EOQ.
2. Calculate the number of orders that will be placed each year.
3. Calculate the reorder point

Solution
1.
EOQ = Sq. root(2AB/C)
A = 10,000
B = $200
C = $7 per jersey
EOQ = sqrt (2*10,000*200/7) = 755.92 (rounded to 756)
2.
Number of orders = Annual quantity required / EOQ
= 10,000/ 756 = 13.22 (rounded to 14)
3.
Average daily demand = Annual quantity / 365
= 10000/365 = 27.397 units
Purchase lead time = 7 days
Reorder point = 27.397* 7
= 191.779 (rounded to 192 jerseys)