102.03 (2) Costing and Control of Materials - by MD - Monowar Hossain, FCMA, CPA, FCS, ACA

Class note for
CMA Professional Level –I

102:COA (Cost Accounting)
CMA
Professional Level –I
102: Cost Accounting
Class 102.03
No. 4 Costing and Control of Materials Math with solutions.
Review of last classes
Problem No. 12 :( Costing and Control of Materials)

M3 Limited produces a product which has a monthly demand of 52,000 units. The product requires a
Component ‘Z’ which is purchased at Tk. 15 per unit. For every finished product, 2 units of Component
‘Z’ are required. The ordering cost is Tk.350 per order and the carrying cost is 12% per annum.
Required:
i. Calculate the economic order quantity for Component ‘Z’.
ii. If the minimum lot size to be supplied is 52,000 units, what is the extra cost, the company has to
incur?
iii. What is the minimum carrying cost, the company has to incur?
Solution of problem no. 12 :( Costing and Control of Materials)
Note: Annual Consumption of Component ‘Z’ = 52,000 units x 2 x 12 months

= 12,48,000 units.
i. Calculation of Economic Order Quantity
ଶ ௫ ଵଶ,ସ଼,଴଴଴ ௫ ்௞.ଷହ଴
EOQ =
்௞.ଵହ ௫ ଵଶ/ଵ଴଴
= 22,030 units.
i. Calculation of Extra Cost if Minimum Lot size to be supplied is 52,000 units.
(a) If Lot size is 52,000 units Amount(Tk.)

Ordering cost = (12,48,000/52,000 x Tk. 350) …………………… 8,400
Carrying cost = (52,000 units x ½ x `Tk.15 x 12/100)…………… 46,800
55,200
(b) If Lot size is 22,030 units (EOQ)

Ordering cost = (12,48,000/22,030 x Tk.350)……………………. 19,828
Carrying cost = (22,030 units x ½ x Tk.15 x 12/100)…………. 19.827
39,655
Extra cost (a) – (b) Tk. 15,545
ii. Minimum Carrying Cost = 22,030 units x ½ x Tk.15 x 12/100

= Tk. 19,827.
Page -50
Saturday, March 21, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
Problem No. 13 :
The balance sheet dated December 31, 2013, has a balance in the Finished Goods Inventory
account of Tk.26,200. The December 31, 2014, balance sheet has a balance in the Finished Goods
Inventory account of Tk.24,000. Work in Process Inventory account has a beginning balance of
Tk.20,000 and an ending balance of Tk.30,000. If the cost of goods manufactured is Tk.340,000, how
much is cost of goods sold?
Solution of problem no. 13 :

Beginning Finished Goods Inventory Tk. 26,200
+ Cost of Goods Manufactured 340,000
= Available 366,200
- Ending Finished Goods Inventory (24,000)
= Cost of goods sold Tk.342,200
Problem No. 14:

Monyem Ltd. uses an actual product costing system. It reported the following amounts for 2014:
Raw materials purchased Tk.72,000 Beginning work-in-process inventory Tk.21,000

Direct materials used 70,000 Ending work-in-process inventory 16,000
Indirect materials used 4,000 Selling and administrative expenses incurred 23,000
Direct labor used 66,000 Other manufacturing overhead costs incurred 18,000
Indirect direct labor used 7,000 Beginning finished goods inventory 6,000
Ending finished goods inventory 9,000
A. Calculate the cost of goods manufactured.

B. Calculate cost of goods sold.
A. The cost of goods manufactured

Cost of direct materials used Tk.70,000
Cost of direct labor used 66,000
Cost of MOH: Tk.18,000 + Tk.4,000 + Tk.7,000 29,000
Total manufacturing costs Tk.165,000
Add beginning WIP 21,000
Less ending WIP (16,000)
Cost of goods manufactured Tk.170,000
B. The cost of goods sold.

Beginning FG inventory Tk.6,000
Add CGM (part A) 170,000
Less ending FG inventory (9,000)
Page -51
Class note for
Problem No. 15:

Muttakeen, Inc. manufactures homework machines. It uses an actual costing system. Muttakeen's
keeps a 'Supplies' account for it's indirect materials. During June, Muttakeen’s transactions and
accounts included the following:
Finished goods inventory, ending Tk.11,600 Sales Tk.324,000

Finished goods inventory, beginning 12,300 Direct labor cost 72,400
Indirect materials issued to production 3,200 Direct materials purchased 178,000
General administrative expenses 9,400 Work in process inventory, ending 12,800
Raw materials inventory, ending 7,700 Work in process inventory, beginning 10,500
Raw materials inventory, beginning 5,100 Total manufacturing overhead 56,100
incurred
Required:
A. How much is cost of goods manufactured?
B. Calculate the cost of goods sold.
C. How much will the company report as product costs on the June 30th balance sheet?
A. Cost of goods manufactured:

Beginning raw materials inventory Tk.5,100
Raw materials purchased 178,000
= Materials available for use Tk.183,100
Less ending raw materials inventory (7,700)
= Materials used in production Tk.175,400
Direct labor used 72,400
Manufacturing overhead costs incurred 56,100
Total manufacturing costs Tk.303,900
Add beginning work in process 10,500
Less ending work in process (12,800)
Cost of goods manufactured Tk.301,600
B. The cost of goods sold

Beginning finished goods Tk.12,300
Cost of goods manufactured 301,600
Less ending finished goods inventory (11.600)
C. The company will report as product costs on the June 30th balance sheet:
Raw materials Tk.11,600
Work in process 12,800
Finished goods 7,700
= Total inventory at 30th June Tk.32,100
Page -52
Class note for
Problem No. 16 (Cost Sheet)

FYR furnishes the following data related to the manufacture of a standard product during the month
of March 2015
Raw material consumed - Tk. 15,000

Direct labour - Tk. 5,000
Machine hours worked - Tk. 900
Machine hour rate - Tk. 5
Administration overheads - 20% of works cost
Selling overheads - Tk. 0.50 per unit
Unit produced - 17,100
Unit sold - 16,000 @ Tk. 4 per unit
You are required to prepare a cost sheet from the above showing:-
(a) The cost per unit
(b) Cost per unit sold and profit for the period
Solution Problem No. 16 (Cost Sheet)
Books of FYR
Cost sheet
(For the month of March 31, 2015)
Particular Amount (Tk.) Amount (Tk.)
Direct material consumed 15,000 0.878

Direct labour 5,000 0.292
Direct expenses 4,000 0.233
-------------- --------------
Prime cost 24,000 1.403
Factory overheads
(900 hours @ Tk. 5 per hour) 4,500 0.263
-------------- ---------------
Work cost 28,500 1.666
Administrative overheads
@ 20% of works cost 5,700 0.333
-------------- ---------------
Cost of production 34,200 2,000
Less:- closing stock on March 31, 2015
(1100 units @ Tk. 2 per unit) 2,200 -----
----------- --------------
Cost of goods sold 32,000 2.000
Selling overheads Tk. 0.50 per unit for 16,000 8,000 0.50
----------- -------------
Cost of sales 40,000 2.50
Profit 24,000 1.50
------------ ------------
Sales (16,000 unit) 64,000 4.00
* Closing stock = unit produced - units sold
= 17100-16000
= 1100 units
Page -53
Class note for
Problem No. 17 (statement of cost)
Prepare a statement of cost from the following trading and P/L account for the year ending March 31, 2015
Particular Amount (Tk.) Particular Amount (Tk.)
To opening stock material 12,000 By sales 2,00,000

Finished goods 40,000 By closing stock material 20,000
To purchases 1,20,000 Finished goods 50,000
To cost of moulds 3,000
To salary of factory manger 1,000
To depreciation of machine 800
To gross profit 63,200
-------------- ---------------
2,70,000 2,70,000
-------------- -------------
To office salary 9,000 By Gross profit 63,200
To salesman salary 6,000 By interest from bank 800
To insurance of office building 1,000 By dividend received 200
To godown expenses 800 By rent received 900
To directors fees 2,000
To telephone charges 700
To showroom expenses 1,200
To delivery van expenses 1,500
To preliminary expenses 2,000
To interest on deb. 700
To market research exp. 600
To net profit 39,000
-------------- --------------
65,100 65,100
-------------- --------------
Solution of problem no. 17 (statement of cost)
Statement of cost
(For the year ending 31st March 2015)
Particular Details (Tk.) Amount (Tk.)
Direct material:-
Raw material purchased 1,20,000
Add:- opening stock of raw materials 12,000
---------------
Raw material for consumption 1,32,000
Less:- Closing sock of raw materials 20,000
---------------
Raw material consumed 1,12,000
Add:- Direct labour 30,000
---------------
Prime cost 1,42,000
Add:- Factory overhead:-
Cost of moulds 3,000
Factory manager salary 1,000
Depreciation on machinery 800
--------------- 4,800
---------------
Factory cost 1,46,800
Page -54
Class note for
Add:- office and administrate overhead

Salary 9,000
Insurance 1,000
Directors fees 2,000
Telephone charges 700
--------------- 12,700
-------------
Cost of production 1,59,500
Add:- Opening stock of finished goods 40,000
--------------
Goods available for sales 1,99,500
Less:- Closing stock of finished goods 50,000
--------------
Cost of goods sold 1,49,500
Add:- selling & distribution ext:-
Salesman’s salary 6,000
Insurance (godown) 800
Showroom expenses 1,200
Expenses of delivery van 1,500
Market research expenses 600
------------- 10,100
----------------
Cost of sales 1,59,600
Profit 40,400
----------------
Sales 2,00,000
Problem No. 18 (Cost Sheet)
Prepare cost sheet from the following particular in the books of MONYEM:
Raw material purchased = Tk. 1, 20,000

Paid freight charges = Tk. 10,000
Wages paid to laborers = Tk. 35,000
Directly chargeable expenses = Tk. 25,000
Factory on cost = 20% of prime cost
General and administrative expenses = 4% of factory cost
Selling and distribution expenses = 5% of production cost
Profit = 20% on sales
Raw material Work in progress Finished goods
Opening stock 15,000 17,500 20,000
Closing stock 20,000 24,000 27,500
Page -55
Class note for
Solution of problem no. 18 (Cost Sheet)
Books of MONYEM
Cost sheet
Raw material purchased 1,20,000

Add:- freight charges 10,000
---------------
Total cost of raw material purchased 1,30,000
Add:- opening stock of raw material 15,000
---------------
Cash of raw material available 1,45,000
Less:- closing stock of raw material 20,000
--------------
Raw material consumed 1,25,000
Add:- wages paid to labours 35,000
Add:- Directly chargeable expenses 25,000
--------------
Prime cost 1,85,000
Add:- Factory overhead 20% of prime cost 37,000
---------------
Current manufacturing cost 2,22,000
Add:- Opening stock of work in progress 17,500
---------------
Total goods processed during the period 2,39,500
Less:- closing stock of work in progress 24,000
---------------
Factory on work cost 2,15,500
Add:- General & administrative expenses 4% of factory cost 8,620
---------------
Cost of production 2,24,120
Add:- opening stock of finished goods 20,000
--------------
Goods available for sales 2,44,120
Less:- closing stock of finished goods 27,500
--------------
Cost of goods sold 2,16,620
Add:- selling and distribution expenses 5% of production cost 11,206
--------------
Cost of sales 2,27,826
Add:- Profit 56,956.50
---------------
Sales 2,84,782.50
Page -56
Class note for
Problem No. 19 (Materials Management)
The following data relate to a particular stock item.
Normal usage… (some average) 110 per day

Minimum usage 50 per day
Maximum usage 140 per day
Lead Time 25 – 30 days
EOQ (Previously calculate) 5,000
Required: Using this data calculate the various control levels of materials.
Solution of problem no. 19 (Materials Management)
Re-order Level = Maximum usage x Maximum Lead Time

= 140 x 30
= 4,200 units
Minimum Level = Re-order Level – Average Usage for Average Lead Time
= 4,200 – (110 x 27.5)
= 1,175 units
Maximum Level = Re-order Level + EOQ – Minimum Anticipated Usage in Lead Time
= 4,200 + 5,000 - (50 x 25)
= 7,950 units
M3 Logistics Ltd has established that annual quantity for a given item is 4,000 units. The cost of placing
an order is Tk.5,000 and the price per unit is Tk.2,000. Inventory holding cost percentage is 20% of
purchase cost.
Required:
a) Formulate the best (optimal) entry policy for this item i.e.
- Quantity to order (EOQ)
- Frequency for ordering and when to order
- Re-order level/point (ROP); For ROP take lead-time to be 15 days while one year has
300 working days
- Total cost associated with the policy.
b) Suppose it actually turns out that Ordering cost per order = Tk.6,000 and Inventory hold cost
percentage I = 15% and yet the policy formulated in (a) above is implemented for a year
determine the cost of perdition error.
Page -57
Class note for

a). Quantity to order (EOQ)
From the question no. 20 we can see that; annual demand, D=4,000 units; cost of ordering,
Co = Tk. 5,000; carrying cost percentage, i =20% of unit cost; unit purchase cost, Cp=Tk. 200. Then;
DCo
EOQ =
C pi
2 × 4000 × 5000
= = 1,000 units
200 × 0.2
Frequency of ordering : This is related to the annual number of orders, N which is given as ;
D 4000
N = = = 4 orders
Q 1000
Given that one year is 12 months, therefore make an order after every, 12/4 = 3 months or quarterly.
Alternatively: If one year is 300 working days make an order every 300/4 = 75 days or 2.5 months
Re-order level /re-order point (ROP) : ROP- represents the quantity remaining when an order is being
made = Usage during lead time period
= daily usage x lead time
=annual usage/No of days in the year x Lead time
4000
= x 15
300
= 200 units
From the foregoing calculations we obtain the following receipt and usage profile through time;
Receipt and usage profile
Q = 1000
ROP= 200
Time
Lead time time between orders

Total Cost (TC) = purchase cost + Holding cost + Ordering cost
= DCp +
Q × Cpi + D C
2 Q o
 1000  4000
= 4000 x 200 +  × 200 × 0.2  + x 5000
 2  1000
= 800,000 + 20,000 + 20,000
= Tk. 840,000
Page -58
Class note for
b). Cost of prediction error
In decision making there are two situations:

1. actual outcome given the data used to make the decision, some of which may not be accurate.
2. optimal outcome, which, on hindsight, would have been the case if all data used to make the
decision was accurate.
The difference then between the actual outcome and the optimal outcome is the cost of prediction
error (CPE).
Also known as;

i) Amount of regret or
ii) Opportunity lost or
iii) Expected value of perfect information
For a cost function (minimization problem) CPE = Actual cost incurred – Cost for optimal policy.
For a profit function (maximization problem), CPE = profit for optimal policy – actual profit made.
For the problem; what changed from predicted values are

i) ordering cost per order, Co = Tk. 6,000 instead of Tk. 5,000.
ii) Inventory holding cost percentage, I = 15% instead of 20%
Hence the purchase cost = D x Cp is irrelevant for CPE calculation, since it the same value for actual
cost incurred and cost for optimal policy.
Relevant total cost for CPE = Q/2 x Cpi + D/Q x Co
Actual relevant cost incurred = 1000/2 x 200 x 0.15 + 4000/1000 x 6000

= Tk. 39,000
Optimal policy
Given that some parameter estimates changed from predicted ones, there is need to calculate EOQ
afresh using all correct parameters.
DCo
EOQ =
C pi
2 × 4000 × 6000
= 1265 units
200 × 0.15
Relevant total cost for Optimal policy = 1265/2 * 200* 0.15 + 4000/1265 * 6000
= Tk. 37,947
Cost of prediction error = Tk. (39,000 – 37,947)

= Tk.1,053
Page -59
Class note for

MUTTAKEEN LTD. buys 30,000 units for an item per year at an ordering cost of Tk.2,500 per order and
holding cost chards are 20% of the cost of average inventory per annum.
The following price quality schedule is available from the supplier.
Quantity (Unit) Unit price (Taka)
1 3000 21.00
3000 5000 19.00
5000 7000 17.00
7001 9000 15.50
9001 and above 13.50
Required : Recommend the best inventory policy for this item.
Quantity range Unit cost 2 x30000 x 2500

(units) (shs) EOQ= Remark
Cpx 0.2
1 - 3000 21.00 5976 Above = Ignore
3001 - 5000 19.00 6283 Above = Ignore
5001 - 7000 17.00 6642 Within = evaluate Q = 6642
6956
7001 - 9000 15.50 Below = evaluate Q=7001
9001 and above 13.50 7454 Below – evaluate Q = 9001

Total Cost (TC) calculations
 6642  30,000
Q = 6642 TC = (30,000x17) +  x17x0.2  + x2,500 = Tk.532,583
 2  6642
7001 30,000
Q = 7001 TC = (30,000x15.5) + x15x0.2 + x2500 = 486,564
2 7001
 9001  30,000
Q = 9001 TC = (30,000x13.5) +  x13.5x0.21 + x2,500 = 425,484
 2  9001
Best inventory policy : EOQ = 9001 units
Timing of orders
30,000
N=D = = 3 orders
Q 9001
Make an order every 12 = 4 months
3
Page -60

102.03 (2) Costing and Control of Materials - by MD - Monowar Hossain, FCMA, CPA, FCS, ACA

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Class note for

CMA Professional Level –I

Review of last classes

Problem No. 12 :( Costing and Control of Materials)

Solution of problem no. 12 :( Costing and Control of Materials)

Note: Annual Consumption of Component ‘Z’ = 52,000 units x 2 x 12 months

i. Calculation of Economic Order Quantity

i. Calculation of Extra Cost if Minimum Lot size to be supplied is 52,000 units.

(a) If Lot size is 52,000 units Amount(Tk.)

(b) If Lot size is 22,030 units (EOQ)

ii. Minimum Carrying Cost = 22,030 units x ½ x Tk.15 x 12/100

Solution of problem no. 13 :

Problem No. 14:

Raw materials purchased Tk.72,000 Beginning work-in-process inventory Tk.21,000

A. Calculate the cost of goods manufactured.

Solution of problem no. 14 :

A. The cost of goods manufactured

B. The cost of goods sold.

Problem No. 15:

Finished goods inventory, ending Tk.11,600 Sales Tk.324,000

Solution of problem no. 15 :

A. Cost of goods manufactured:

B. The cost of goods sold

Problem No. 16 (Cost Sheet)

Raw material consumed - Tk. 15,000

Direct material consumed 15,000 0.878

Problem No. 17 (statement of cost)

Particular Amount (Tk.) Particular Amount (Tk.)

To opening stock material 12,000 By sales 2,00,000

Solution of problem no. 17 (statement of cost)

Add:- office and administrate overhead

Problem No. 18 (Cost Sheet)

Raw material purchased = Tk. 1, 20,000

Solution of problem no. 18 (Cost Sheet)

Raw material purchased 1,20,000

Problem No. 19 (Materials Management)

The following data relate to a particular stock item.

Normal usage… (some average) 110 per day

Solution of problem no. 19 (Materials Management)

Re-order Level = Maximum usage x Maximum Lead Time

Problem No. 20 (Materials Management)

Solution of problem no. 20 (Materials Management)

Lead time time between orders

b). Cost of prediction error

In decision making there are two situations:

Also known as;

For the problem; what changed from predicted values are

ii) Inventory holding cost percentage, I = 15% instead of 20%

Relevant total cost for CPE = Q/2 x Cpi + D/Q x Co

Actual relevant cost incurred = 1000/2 x 200 x 0.15 + 4000/1000 x 6000

Cost of prediction error = Tk. (39,000 – 37,947)

Problem No. 21 (Materials Management)

Solution of problem no. 21 (Materials Management)

Quantity range Unit cost 2 x30000 x 2500

3001 - 5000 19.00 6283 Above = Ignore

5001 - 7000 17.00 6642 Within = evaluate Q = 6642

9001 and above 13.50 7454 Below – evaluate Q = 9001

Best inventory policy : EOQ = 9001 units

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