PROF.

BHAMBWANI’S
RELIABLE CLASSES
QUESTIONS OF RECORDED LECTURES
MATERIAL COSTING
LEC 1:
EOQ THEORY (PART 1)

LEC 2:
EOQ THEORY (PART 2)

LEC 3:

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

Annual Demand 2,400 units Storage cost 2% per annum
Unit Price Rs 2.40 Interest Rate 10% p.a.
Ordering Cost per order Rs 4.00 Lead Time Half month
Calculate Economic Order Quantity, and total annual inventory cost in
respect of the particular raw material.

LEC 4:
A large local government authority places orders for various stationery items at
quarterly intervals.
In respect of an item of stock coded A 32, data are :
* Annual usage 5,000 boxes.
* Minimum order quantity 500 boxes.
* Cost per box Rs. 2/-.
Usage of material is on regular basis and on an average, half of the amount
purchased is held in inventory. The cost of storage is considered to be 25%
of the inventory value. The average cost of placing an order is estimated at
Rs. 12.5.
The chief executive of the authority has asked you to review the present
situation and to consider possible ways of effecting cost savings.
You are required to:
(a) Tabulate the costs of storage and ordering item A 32 for each level of
orders from four to twelve placed per year.
(b) Ascertain from the tabulation the number of orders which should be
placed in a year to minimize these costs.
(c) Produce a formula to calculate the order level which would minimise
these costs. Your formula should explain each constituent part of the
formula and their relationships.
(d) Give an example of the use of the formula to confirm the calculation in
(b) above.
(e) Calculate the percentage saving on the annual cost which could be made
by using the economic order quantity system.

LEC 5:

The annual demand for raw material R is 4,000 units and the purchase price is
expected to be Rs.90 per unit. The incremental cost of processing an order
is Rs.135 and the cost of storage is estimated to be Rs. 12 per unit.
(a) What is the optimal order quantity and the total relevant cost of this
order quantity?
(b) Suppose that Rs.135 estimate of the incremental cost of processing an
order is incorrect and should have been Rs.80. Assume that all the other
estimates are correct. What is the cost of this prediction error
assuming that the solution to part (a) is implemented for one year?
(c) Assume at the start of the period, a supplier offers 4,000 units at a
price of Rs.86. The materials will be delivered immediately and placed
in the stores. Assume that the incremental cost of placing this order is
zero and the original estimate of Rs.135 for placing an order for the
economic batch size is correct. Should the order be accepted?

LEC 6:
X Ltd. is committed to supply 24,000 bearings per annum to Y ltd. on a steady
basis. It is estimated that it costs 10 paise as inventory holding cost per
bearing per month and that the set –up cost per run of bearing manufacture
is Rs.324.
(a) What would be the optimum run size for bearing manufacture?
 (b) Assuming that the company has a policy of manufacturing 6,000 bearings
per run, how much extra costs the company would be incurring as compared
to the optimum run suggested in (a) above?
(c) What is the minimum inventory holding cost?
(d) What would be the internal between 2 consecutive optimums runs?

LEC 7: PROBLEMS OF DISCOUNT

EXE Ltd. has received an offer of quantity discounts on its order of materials as
under:
Price per tonne (Rs.) Tonnes (Rs.)
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 tonnes. The ordering cost
per order is Rs. 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.

LEC 8:

The quarterly production of a company’s product which has a steady market is

20,000 units. Each unit of a product requires 0.5kg. 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 materials is
maintained by the company. The company has been able to negotiate the
following discount structure with the raw material supplier:
Order Quantity Discount
Kgs. Rs.
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 materials after considering the discount if the company elects
to place one, two, four or six orders in the year.
(iii) State the number of orders which the company should place to minimize
the costs after taking EOQ also into consideration. (M-02)

LEC 9:
THEORY ON SETTING LEVELS

LEC 10:
From the following information you are required to calculate, for each product:
(a) Re-order level (b) Maximum stock (c) Minimum stock (d) Average
stock.
Product X Product Y
Average Consumption per week 50 50
Minimum requirement per week 25 25
Maximum usage per week 75 75
EOQ 300 500
Replacement time 4 to 6 2 to 4
weeks weeks

LEC 11:
Shriram Enterprises manufactures a special product ZED. The following particulars
were collected for the year 1990 :
(a) Monthly demand of ZED - 1,000 units.
(b) Cost of placing an order Rs. 100.
(c) Annual carrying cost per unit Rs. 15.
(d) Normal usage 50 units per week.
(e) Minimum usage 25 units per week.
(f) Maximum usage 75 units per week.
(g) Re-order period 4 to 6 weeks.
 Compute from the above :
(a) Re-order Quantity
(b) Re-order level.
(c) Minimum level
(d) Maximum Level
(e) Average stock level.

LEC 12:

A company uses three raw materials A, B, and C for a particular product for which
the following data apply:
Raw Usage Re- Price Delivery in Period Re- Minimum
Mater per order Per Kg ( in weeks) order level
ial unit of Quantit level (Kgs)
product y (Kgs) (Kgs)
(Kgs)
Min. Avg Max
.
A 10 10,000 0.10 1 2 3 8,000
B 4 5,000 0.30 3 4 5 4,750
C 6 10,000 0.15 2 3 4 2,000

Weekly production varies from 175 to 225 units, averaging 200 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?

LEC 13:
If the minimum stock level and average stock level of raw-material A are 4,000
and 9,000 units respectively, find out its Re-order quantity.

LEC 14:
THEORY ON STOCK VALUATION

LEC 15:

Shilpa Ltd. furnishes the following store transactions for September,2001:

01.9.2001 Opening balance 25 units, value Rs.162.50
04.9.2001 Issues Req.no.85 8 units
06.9.2001 Receipts. from B & Co-GRN No.26 50 units @ Rs.5.75 p.u.
07.9.2001 Issues Req. No. 97 12 units
10.9.2001 Return to B & Co. 10 units
12.9.2001 Issues Req. No. 108 15 units
13.9.2001 Issues Req. No. 110 20 units
15.9.2001 Receipts. From M & Co-GRN No.33 25 units @ Rs.6.10 p.u.
17.9.2001 Issues Req.No. 121 10 units
19.9.2001 Received Replacement from
B & Co. – GRN No.38 10 units
20.9.2001 Return from department material
of M & Co.- MRR No.4 5 units
22.9.2001 Transfer from job182 to job187 5 units
26.9.2001 Issues Req.No.146 10 units
29.9.2001 Transfer from Dept A to Dept B 5 units
30.9.2001 Shortage in stock taking 2 units
Write up the priced stores ledger on FIFO & LIFO method and discuss how
would you treat the shortage in stock taking.

LEC 16:

From the information provided as under, you are required to prepare a statement
showing how the issues would be priced if LIFO method is followed.
1-2-90 Opening Balance 100 units at Rs.10 each.
1-2-90 Received 200 units at Rs.10.50 each.
2-2-90 Received 300 units at Rs.10.60 each.
4-2-90 Issued 400 units to job A vide M.R. No. 015.
6-2-90 Issued 120 units to job K vide M.R.No.020.
7-2-90 Received 400 units at Rs.11 each.
10-2-90 Issued 200 units to job B vide M.R.No.031.
 12-2-90 Received 300 units at Rs.11.40 each.
13-2-90 Received 200 units at Rs.11.50 each.
17-2-90 Issued 400 units to job D vide M.R.No.040.

LEC 17:

Prepare a Statement showing the pricing of issues, on the basis of (a) simple
Average and (b) Weighted Average methods from the following information
pertaining to Material D.
1-3-90 Purchased 100 units @ Rs.10 each.
2-3-90 Purchased 200 units @ Rs.10.20 each.
5-3-90 Issued 250 units to job X vide M.R.No. 12.
7-3-90 purchased 300 units @ Rs.10.50 each.
10-3-90 Purchased 200 units @ Rs.10.80 each.
13-3-90 Issued 200 units to job Y vide M.R. No. 15
18-3-90 Issued 200 units to job Z vide M.R.No.17.
20-3-90 Purchased 100 units @ Rs.11 each.
25.3.90 Issued 150 units to job K vide M.R.No.25.

LEC 18:

Following extract of Raw Material X could be obtained for June, 2001 from stores
ledger.
2001 Receipts Issues Balance
June Balance b/d @ Rs.5.00 150
,1
3 GRN 45 @ Rs.5.00 20
5 Issue requisition 70 130
9 Issue requisition 74 30
14 GRN - 56 @ Rs.4.50 100
17 GRN - 60 @ Rs.4 40
21 Issue Requisition - 80 100
23 GRN @ 65 Rs.5.5 80
25 Issue Requisition - 85 60
29 Issue Requisition - 89 70
30 GRN - 69 @ Rs.6 160
The cost accountant argues that let any method be followed for stock
valuation, the value of stock will be indifferent. Whether his contentions
are correct ? If yes, state reasons.

LEC 19:
THEORY ON PRICING OF MATERIAL

LEC 20:

One parcel containing two important materials was received by a factory and the
invoice pertaining to the same discloses the following information :
I Material 500 1bs. @ Rs.2 per 1b.Rs.1000.00
II Material 600 1bs. @ Rs.1.60 per 1b.Rs. 960.00
Insurance Rs. 39.20
Sales Tax Rs. 98.00
Freight etc. Rs. 55.00

Due to mishandling in the factory’s store a loss of 10 units of I material

and of 6 of II material was noted. What rate would you adopt for issuing
these vital components to the jobs? And also give your changed rate, if a
provision of 10% is to be kept for probable risk of obsolescence.

LEC 21:

A manufacturer of Surat Purchased three chemicals A,B and C from Bombay. The
invoice gave the following information: Rs.
Chemical A:3,000 Kg.@Rs.4.20 per Kg. 12,600
Chemical B:5,000 Kg.@Rs.3.80 per Kg. 19,000
Chemical C:2,000 Kg.@RS.4.75 per Kg. 9,500
Sales Tax 2,055
Railway Freight 1,000
Total cost 44,155

A shortage of 200 Kg. in chemical A, of 280 Kg. in chemical B and of 100 Kg.
in chemical C was noticed due to breakage. At Surat, the manufacturer paid
 octroi duty @ Re.0.10 per Kg. He also paid cartage Rs.22 for chemical A,
Rs.63.12 for Chemical B and Rs.31.80 for chemical C.
Calculate the stock rate assuming a provision of 5% towards further
deterioration.

LEC 22:
The following details are available in respect of a consignment of 1,250 kgs. Of
material ‘X’:
(a) Invoice Price – Rs.20 per kg.
(b) Excise Duty – 25% of invoice Price.
(c) Sales Tax – 8% on Invoice price including Excise Duty
(d) Trade Discount – 10% on Invoice price
(e) Insurance- 1% of aggregate net price
(f) Delivery charges – Rs.250
(g) Cost of containers @ Rs.60 per container for 50 kg. of material. Rebate
is allowed @ Rs.40 per container if returned within six weeks, which is
a normal feature.
(h) One container load of material was rejected on inspection and not
accepted.
(i) Cost of unloading and handling @ 0.25% of the cost of materials
ultimately accepted. On the basis of above you are required to find out
the landed cost of per kg. of material ‘X’.

LEC 23:

The books of Excellent Chemicals Limited reveal the following data regarding
imported chemicals used in the manufacture of their products during 1994-95:

Quantity Rate Exchange

Chemicals imported(kg.) (in U.S $ per Kg.) Rate
P 3,000 3.00 U.S. $ = Rs.32.00
Q 4,500 2.40
R 5,000 4.00

Import duty paid was 25% of Invoice value for chemicals P and Q and 40% for
chemical R. Insurance was paid @ 2.5% on invoice value and a sum of
Rs.75,000 was incurred towards freight and clearing charges. Stores overhead
applied was 5% on the total purchases cost of materials.
During the year 80% of the materials imported were issued to production.
Assuming 4% allowance is provided to cover loss, ascertain
(i) total cost of materials and
(ii) value of closing stock of each type of chemicals.
What is the cost of each material charged to production?
Also prepare a statement showing
(a) the quantity of material issued,
(b) storage loss, and
(c) closing stock of each type of chemicals.

LEC 24:

A Company is considering a selective inventory control using the following data.

Item Units Units Cost
Rs.
1 6,000 4.00
2 61,200 0.05
3 16,800 2.10
4 3,000 6.00
5 55,800 0.20
6 22,680 0.50
7 26,640 0.65
8 14,760 0.40
9 20,520 0.40
10 90,000 0.10
11 29,940 0.30
12 24,660 0.50
Assuming the ABC plan of selective control is in operation. Tabulate the above
data for presentation to management under such ABC Plan.
LEC 25:

The following data are available in respect of material X for the year ended 31st
March,1997:

Rs.
Opening stock 90,000
Purchases during the year 2,70,000
Closing stock 1,10,000
Calculate (i) Inventory turnover ratio; and (ii) the number of days for
which the average inventory is held.

LEC 26:
A company 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 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.

LEC 27:
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
Re.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 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 material.
(ii) Advise, 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 material should be
negotiated?

LEC 28:
IPL Limited uses a small casting in one of its finished products. The castings
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 basis. 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 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 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?
(v) 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 is
Rs.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?