CLASS-10

22.06.2021 (Tuesday)

Cost Accounting
(Acc 233)

Chapter-3: Costing and Control of Materials

Outline:

1. Materials and Classification of materials.

2. Inventory of materials valuation and its objectives.

3. Inventory valuation method

 First-in, first-out (FIFO) method.

 Last-in, first-out (LIFO) method.

4. Problems and Solutions relating to materials valuation methods.

5. Planning materials requirement.

6. Problems and Solutions relating to planning materials requirement.

Ms. Rehana Fowzia, Associate Professor, Business Administration (Accounting), Stamford University Bangladesh.
 Planning materials requirement

EOQ (re-order quantity): Economic order quantity or re-order quantity is the optimum or the most
favorable quantity which should be purchased each time the purchases are to be made. The EOQ is one
where the cost of carrying inventory is equal or almost equal to the cost of placing the order. At EOQ
level, the total of the two costs are minimum.

EOQ = √{(2 × U × O) ÷IC}

where, U=Annual usage, O= Ordering cost per order, I=% of cost of inventory and C=Cost of materials
per unit.

Re-order level: The order point or re-order level is a point or quantity level at which if materials in store,
the preparation for the order of supply of materials must be made. Re-order level is maintained for lead
time (the difference between the time of order and time of receiving the delivery). Lead time is also
known as re-ordered period.

Re-order level= Maximum usage × Maximum re-order period (lead time)

Minimum level: Minimum level is also known as safety stock level or buffer stock. In other words, stock
beyond this level should not be allowed to fall otherwise continuous production run can hamper.

Minimum level= Re-order level – (Average usage× Average re-order period)

Maximum level: The maximum level ensures that the stock will not exceed this limit although there may
be low demand for materials or quick delivery from the suppliers.

Maximum level= (EOQ+ Minimum level)

Average level: Average level is the average of the sum of minimum level and maximum level.

Average level= (Maximum level+ Minimum level) ÷2

Problem#3:Wania fashion manufacturing organization manufactures a special product “W”. The
following particulars were collected for year 2016:

a) Cost of placing an order is tk.100. b) Annual carrying cost per unit is tk. 15. c) Normal uses are 50
units per week. d) Minimum uses are 25 units per week. e) Maximum uses are 75 units per week. f) Re-
order period is 4 to 6 weeks.

Requirements: Determine (i) Re-order quantity (ii) Re-order level (iii) Minimum level
(iv) Maximum level (v) Average level.

Solution:
EOQ (re-order quantity)= √{(2 × U × O) ÷IC}

where, U=Annual usage, O= Ordering cost per order, I=% of cost of inventory and C=Cost of materials
per unit.

(i) EOQ (re-order quantity) = √{(2 ×(50 ×52) ×100) ÷15}

= √ (2 ×2600×100) ÷15
=√ (520000÷15)
=√ 34666.67
=186 units

(ii) Re-order level =Maximum usage × Maximum re-order period

= 75×6
= 450 units

iii) Minimum level= Re-order level – (Average usage× Average re-order period)
= [450 – {(Maximum usage+ Minimum usage)÷2}×{ Maximum re-order period+ Minimum reorder period)÷2}]
= [450 – {(75+25) ÷2}× { (6+4) ÷2}]
= 450 – (50×5)
= 450- 250
=200 units

iv) Maximum level= (EOQ+ Minimum level)

 = 186 +200
= 386 units

v) Average level= (Maximum level+ Minimum level) ÷2

= (386+200) ÷2
= 586 ÷2
= 293 units

Assignment-7
“W and W” fashion manufacturing organization manufactures a special product “W”.
The following particulars were collected for year 2019:

a) Cost of placing an order is tk1.50 . b) Annual carrying cost per unit is 20%. c) Normal
uses are 250 units per day. d) Minimum uses are 150 units per day. e) Maximum uses are
350 units per day. f) Re-order period is 60 to 70 days. g) Cost per unit is tk. 2.
h) Annual usage is 75000 units.

Requirements: Determine (i) Re-order quantity (ii) Re-order level (iii) Minimum
level (iv) Maximum level (v) Average level.