Professional Documents
Culture Documents
CMA
Professional Level –I
102: Cost Accounting
-Classification of Materials; -Accounting for Materials;
-Pricing the Issue of Materials Valuation of Inventory;
-Periodic Inventory System and Perpetual Inventory System;
Class 102.03 -Inventory Planning; -Ordering Cost, -Holding Cost and EOQ;
No. Costing and -Effect of Quantity Discounts on EOQ;
3&4 Control of Materials -Safety Stock and Reorder Point; -Material Control Methods;
-Impact of JIT on Inventory Accounting;
-Materials Requirement Planning System.
Material is anything made of matter, constituted of one or more substances. Wood, cement, hydrogen, air and
water are all examples of materials. Sometimes the term "material" is used more narrowly to refer to substances
or components with certain physical properties that are used as inputs to production or manufacturing. In this
sense, materials are the parts required to make something else, from buildings and art to stars and computers.
Classification of Materials:
Metals Polymeric
• Ferrous metals and alloys (irons, carbon steels, • Thermoplastics plastics
alloy steels, stainless steels, tool and die steels) • Thermoset plastics
• Nonferrous metals and alloys (aluminum, copper, • Elastomers
magnesium, nickel, titanium, precious metals,
refractory metals, superalloys)
Ceramics Composites
• Glasses • Reinforced plastics
• Glass ceramics • Metal-matrix composites
• Graphite • Ceramic-matrix composites
• Diamond • Sandwich structures
• Concrete
Accounting for Materials
- Purchase of materialsPurchase RequisitionPurchase OrderReceiving Report
- Issuance of materials Materials requisition form
Page -24
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Purchasing Procedure
(1) Specification of Material.
(2) Purchase Requisition.
(3) Selection of Suppliers.
(4) Purchase Orders.
(5) Goods Received Note.
(6) Inspection of Materials.
Page -25
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Inventory Control: An inventory control system is a process for managing and locating objects or
materials.Inventory control is concerned with minimizing the total cost of inventory.Inventory control is the
delicate balance of the costs versus profits associated with having stock on hand.
Inventory Control is the supervision of supply, storage and accessibility of items in order to ensure an
adequate supply without excessive oversupply.It can also be referred as internal control - an accounting
procedure or system designed to promote efficiency or assure the implementation of a policy or safeguard
assets or avoid fraud and error etc.
Page -26
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
c) Periodic simple average price method = Total unit price of certain period
Total Number of purchases of that period
(This rate is used for all issues for that period. Period means a month (or) week (or) year)
Page -27
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
The above approaches are related to calculation & valuation of material stock. However it is equally important
to control the material cost. For controlling the cost, it is necessary to decide how much should be purchased,
when to purchased, what should be stock level, how much discount should be demanded d from the supplier etc.
It is also necessary to keep check over material turnover. For controlling the material cost.
FIFO (First In First Out): This inventory valuation method means those products that arrive in inventory
invent first,
are first to be sold.
It is very common to use the
FIFO method if one trades in
foodstuffs and other goods
that have a limited shelf life,
because the oldest goods
need to be sold before they
pass their sell-by
sell date.
LIFO
LIFO (Last In First Out): This inventory method implies that the most recent received product into inventory is
the first to be sold.
Page -28
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
The weighted average method is used to assign the average cost of production to a product. Weighted average
costing is commonly used in situations where:
• Inventory items are so intermingled that it is impossible to assign a specific cost to an individual unit.
• The accounting system is not sufficiently sophisticated to track FIFO or LIFO inventory layers.
• Inventory items are so commoditized (i.e., identical to each other) that there is no way to assign a cost
to an individual unit.
Since the cost per unit and volume ordered fluctuates, a heavier volume might correlate to various prices. In
order for the weighted average to be truly representative, use the following calculation:
{(April Price X Volume) + (May Price X Volume) + (June Price X Volume)} / Total Volume Ordered
Page -29
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
A company purchasing inventory of an item in April at $2.00, May at $2.25 and June at $2.35. In each of
these months, the company purchased 200, 300 and then 400 of these items. These purchases are
represented in the table below.
Here’s an example of how FIFO looks on an Income Here’s an example of how LIFO looks on an Income
Statement. With this inventory method, the Statement. With this inventory valuation method, the
company’s COGS are lower and ending inventory is COGS are higher and ending inventory value
higher. This is because the earlier inventory is used lower. We have a lower inventory value because the
first and we’ve matched sales with this lower valued last inventory purchased is more expensive and we’ve
inventory. matched our sales to this higher valued inventory.
Page -30
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Calculations: COGS, Gross Profit & Net Profit in Calculations: COGS, Gross Profit and Net Profit in
above table above table.
1. COGS (Beginning Inventory + New 1. COGS (Beginning Inventory + New
Purchases) – Ending Inventory = ($6,000.00 Purchases) – Ending Inventory
+ $10,000.00) - $10,000 =$6,000.00
$6,000.00 = ($6,000.00 + $10,000.00) - $5,000
2. Gross Profit: Sales – “COGS” = $15,000.00 - =$11,000.00
$6,000.00 = $9,000.00 2. Gross Profit: Sales – “COGS” = $15,000.00 -
3. Net Profit: Gross Profit – Expenses = $9,000 $11,000.00 = $4,000.00
- $2,500.00= $6,500.00 3. Net Profit: Gross Profit – Expenses = $4,000
- $2,500.00= $1,500.00
The specific identification method refers to the tracking and costing of inventory based on the movement of
specific, identifiable inventory items in and out of stock. This method is applicable when individual items can be
clearly identified, such as with a serial number, stamped receipt date
Formula :
1) Reorder level - It represents that level of stock of which fresh quantity of material should be purchased. The
Purchased Quantity will be EOQ.
Reorder level = Maximum usage x Maximum lead time (Or)
=Minimum
Minimum level + (Average usage x Average Lead time)
Page -31
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
4) Average level = Minimum level +Maximum level (or) Minimum level + ½ Reorder quantity
2
5) Danger level (or)
Safety stock level =Minimum usage x Minimum lead time (preferred) OR
= Average usage x Average lead time OR
= Average usage x Lead time for emergency purposes
8) Under EOQ Buying cost = Carrying cost Where, A = Annual Consumption of Qty
B = Buying cost OR cost of placing one
order.
9) Carrying Cost
CS = Cost of storing one unit of material
= Average inventory x Carrying cost per unit pa x Carrying cost % OR
for 1 year.
= Average Inventory x Carrying cost per order pa
If the cost of the Investment is given then such
cost also will be part of CS
10) Average inventory = EOQ/2
Note :- Whenever Discount Factor given in a
11) Buying cost = Number of Orders x ordering cost problem. These Formula will not be apply for
calculating EOQ.
12) Number of Orders = Annual Demand / EOQ
16) Total Inventory cost = Ordering cost + Carrying cost of inventory +Purchase cost
Remarks : 1) High Inventory Turnover Ratio indicates that the material in the question is fast moving
2) Low Inventory Turnover Ratio indicates over investment and locking up of workingCapital in inventories
Page -32
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
A-items are goods which annual consumption value is the highest. The top 70-80% of the annual consumption
value of the company typically accounts for only 10-20% of total inventory items.
C-items are, on the contrary, items with the lowest consumption value. The lower 5% of the annual
consumption value typically accounts for 50% of total inventory items.
B-items are the interclass items, with a medium consumption value. Those 15-25% of annual consumption
value typically accounts for 30% of total inventory items.
Particulars QuantityValue
“A” – Important material 10% 70%
“B” – Neither important nor unimportant 20% 20%
“C” – Un-important 70% 10%
Note:-
1) Material received as replacement from supplier is treated as fresh supply
2) If any material is returned from Department after issue, it has to be first disposed in the next issue of material
3) loss in the book balance of stock and actual is to be transferred to Inventory adjustment a/c and from there if
the loss is normal it is transferred to Over Head control a/c. If it is abnormal it is transferred to costing profit and
loss a/c.
4) CIF = Cost Insurance and Freight (This consignment is inclusive of prepaid insurance and freight)
5) FOB = Free on Board (Materials moving by sea – insurance premium is not paid)
6) FOR = Free on Rail (Insurance and freight is not borne by the supplier but paid by the company or purchase)
7) For each receipt of goods = Goods Receipt note
8) For each issue of goods = Materials Requisition note (or) Material Issue note
Accounting Treatment :-
1) Normal Wastage = It should be distributed over goods output increasing per unit cost
2) Abnormal Wastage= It will be charged to costing profit and loss a/c
3) Sale value of scrap is credited to costing profit and loss a/c as an abnormal gain.
4) Sale proceeds of the scrapcan be deducted from material cost or factory overheads.
5) Sale proceeds of scrap may be credited to particular job.
6) Normal Defectives = cost of rectification of defectives should be charged to specific
Page -33
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
7) Abnormal Defectives = this should be charged to costing profit and loss a/c
8) Cost of Normal spoilage is to borne by good units
9) Abnormal spoilage should be charged to costing profit and loss a/c
Periodic Inventory System and Perpetual Inventory System
Periodic Inventory - Periodic inventory is a method wherein any inventory sold is physically counted at the end
of an accounting period, deducted from the beginning inventory plus inventory purchases, and the difference
moved to the cost-of-goods-sold (COGS) account. A complete physical counting under a periodic inventory
system is usually done at specific times of the year, such as quarterly or annually, depending on the business.
This is a simple method, but it does not allow the business to maintain accurate information regarding inventory
problems or shortages.
-Inventory account and cost of goods sold are non-existent until the physical count at the end of the year.
-Purchases account is used to record purchases.
-Purchase Return account is used to record Purchases Returns account.
-Cost of goods sold or cost of sale is computed from the ending inventory figure
-For goods returned by customers there are no inventory entries.
Perpetual Inventory -
Perpetual inventory is the
continuous calculation of
inventory. Businesses update
inventory with each purchase
and deduct inventory after
each sale. This method allows
for an accurate inventory
measurement on a daily basis.
- Account and the balance of costs of goods sold and inventory account exist all the time.
- No individual purchases account but the purchases are recorded in the Inventory Account.
- No individual Purchase Returns account but the purchases return are recorded in the Inventory Account.
- Record cost of goods sold/cost of sale – inventory is reduced when there is a sale.
Page -34
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
- Returns from customers are recorded by reducing the cost of goods sold and adding back into inventory.
Inventory Planning:
Page -35
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
EOQ - Economic order quantity is the level of inventory that minimizes the total inventory holding costs and
ordering costs. EOQ is that size of the order which gives maximum economy in purchasing any material and
ultimately contributes towards maintaining the material
materialss at the optimum level and at the minimum cost.In other
words, the economic order quantity (EOQ) is the amount of inventory to be ordered at one time for purposes
of minimizing annual inventory cost.
As an example, in a company where order cost is estimated at Tk. 10 and
with a holding cost of 25% of item value if annual demand is 1,000 units at
a supply price of Tk.36, if we substitute these figures in the EOQ formula
then the EOQ is 48 units
Effect of Quantity
antity Discounts on EOQ:
The EOQ-Model
Model of inventory problem can determine ordering cycle and quantity. When the
purchase unit price is constant, ordering cycle and ordering quantity, which minimize the one
day's average inventory cost, is not dependent on the purchase price. But if purchase price
may change, the EOQ-Model
Model must be modified. The purchase unit price is discounted as the
ordering becomes larger. The discount of purchase price is described with a decreasing
function of ordering quantity. This function is not always continuous with respect to the
ordering quantity. Under this condition one day's average profit can be defined. And we can
determine ordering cycle and ordering quantity, which maximize one day's average profit.
Moreover,
er, we consider the situations under which the setup cost depends on the ordering
quantity. In this case the setup can be described with the increasing function of ordering
quantity. We show that the EOQ
EOQ-Model
Model can be applied if it is modified by introducing
introducin the
continuous setup cost function. This function is not differentiable at some levels of ordering
quantity.
Page -36
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Safety stock (also called buffer stock) is a term used by logisticians to describe a level of extra stock that is
maintained to mitigate risk of stockouts (shortfall in raw material or packaging) due to uncertainties in supply
and demand.
Page -37
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
without any delay and also it should be at optimum level without any over-stocking problem. For this, cost
accountant has to use following techniques for controlling the material or inventory.
1st method: Setting of various stock
level
‘B’ category of items (units) are relatively less important – 20% of the total items (units) of material handled by
stores and % of investment required is about 20% of total investment in inventories.
‘C’ category – 70% of total items (units) handled and 10% of value.
Page -38
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
For ‘A’ category items (units), stocks levels and EOQ are used and effective monitoring is done.
For ‘B’ category same tools as in ‘A’ category are applied.
For ‘C’ category of items, there is no need of exercising constant control. Orders for items in this group may be
placed after 6 months or once in a year, after ascertaining consumption requirement.
Question 06 :
(a) You just joined a company. The company set up a department to deal with stock control.
(b) Your boss asked you to narrate the functions of the stock controller and the importance that this
department must operate efficiently.
Answer-06 :
(a) Function of the stock controller:
· Management of storehouses
· Accepting or rejecting materials after inspection and checking
· Responsibility for the recording of receipts ad issues of materials on the bin cards
· Preparation of purchase requisitions in respect of low stocks
· Issuing materials on the authority of material requisitions
· Responsibility for the safe custody and protection of stock so as to avoid loss and deterioration.
(b) Reasons why the stock control function must be efficiently performed:
· Production departments need a balanced flow of materials to suit their requirements
· Excessive handling must be avoided as this increases the cost but not the value of the goods
· Efficient handling improves productivity
· Faulty storage leads to deterioration of materials.
Question 07 :
If you should decide to install a system of perpetual inventory and continuous stocktaking, what advantages
would you expect the company to receive?
Answer-07:
· A stricter control of stock helps to reduce the loss due to pilferage and wastage
· Deterioration and other storage faults are detected earlier and losses may be avoided
· Records will provide information for determination of maximum and minimum stock and will enable optimum
order size to be established
· Interim accounts can be prepared without special stocktaking
· With continuous stocktaking the perpetual records can be used and the dislocation of annual stocktaking can
be avoided.
(a) The rate of consumption or usage. This can be found by referring to past records or by an
estimate based on production and sales expected in the future
Page -39
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
(b) Cost of re-ordering. This is not an easy calculation , due to the variety of work carried out in
the purchasing department for different products and for different purposes, but a figure has to
be placed on the cost of dealing with orders and the expenses of receiving and inspecting the
goods.
(c) The storage and holding cost. This includes the interest on capital invested in stock, together
with other charges such as those of deterioration and obsolescence, insurance and certain
handling costs
Answer-09: 1. Right quality 2. right quantity 3. right place 4. right time 5. right price
Objectives or goals of purchasing function : Primary objective or goal of purchasing function is making
inputs available to the conversion process at minimum cost to the final output of the company. Thus focus is on
system output rather than on micro level objectives. The inputs to be made available are raw materials, semi
finished items, bought out items etc. There are certain parameters to be monitored for fulfilling the system
objectives. We can call them goals of purchasing. These goals are popularly known as 5R’s of purchase
namely, right price, right quantity, right quality, right place and right time. In simple terms, if the above 5Rs are
achieved primary objective is fulfilled:-
• Right Price: Right price is determined by costing the production process of the supplier. Right price is
determined by allowing reasonable profit for the supplier and insisting and helping to reduce cost.
Tender system should be used to identify lowest responsible bidder rather than lowest bidder.
Principles normally used to ensure right price are cost structure and learning curve.
• Right Quantity: Right quantity of purchase is the one that ensures no excess and no shortage. High
priority items are subjected to EOQ analysis to determine the right quantity for purchase. This ensures
overall minimum cost for inventory.
• Right Quality: In an item purchased should ensure adhering to mutually accepted standard by supplier
and customer at the time of finalizing the purchase order. The accepted standard may be a drawing, a
sample, a grade or a universal standard like DIN, IS, BS etc.
• Right Place: is the one where the item is going to enter the value stream. If the item is not available
here, when needed, it is in short supply for the process.
• Right Time: is as decided by production schedule for meeting customer’s requirements
Monyem Ltd. are the manufacturers of picture tubes for T.V. The following are the details of their operation
during 2014:
Average monthly market demand 2,000 Tubes
Inventory carrying cost 20% per annum
Ordering cost Tk. 100 per order
Cost of tubes Tk. 500 per tube
Normal usage 100 tubes per week
Minimum usage 50 tubes per week
Maximum usage 200 tubes per week
Lead time to supply 6-8 weeks
Page -41
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Monowar Limited uses a small casting in one of its finished products. The castings are purchased from a
foundry.Monowar Limited purchases 54,000 castings per year at a cost of Tk.800 per casting. The castings are
used evenly throughout the year in the production process on a 360-day-per-year basis. The company
estimates that it costs Tk.9,000 to place a single purchase order and about Tk.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 ofdelivery time and percentage of their occurrence
are shown in the following tabulation:
Required:
Complete the receipts and issues valuation by adopting the First In First Out (FIFO), Last In Last Out (LIFO)
and the Weighted Average Method.
The books of Farhana AB Ltd. present the following data for the month of August, 2013. Direct labour cost Tk.
17,500 being 175% of works overheads. Cost of goods sold excluding administrative expenses Tk. 56,000.
Inventory accounts showed the following opening and closing balance:
01 –Aug-14 31-Aug-14
(Tk.) (Tk.)
Raw materials 8,000 10,600
Works in progress 10,500 14,500
Finished goods 17,600 19,000
Page -42
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
You are required to: (a) Compute the value of materials purchased
(b) Prepare a cost statement showing the various elements of cost and also the profit earned.
Calculate:
About 50 items are required every day for a machine. A fixed cost of Tk. 50 per order is incurred for placing an
order. The inventory carrying cost per item amounts to Tk. 0.02 per day. The lead period is 32 days.
Farhana Ltd. has recorded the following data in the two most recent periods:
Total cost of production Volume of Production
Tk. (Units)
14,600 800
19,400 1200
What is the best estimate of the company’s fixed costs per period?
Problem No. 11: (Inventory – E.O.Q)
You are given the following data relating to MMH Ltd.:
Cost of placing each order (i.e. Ordering Cost) Tk. 4.50
Annual demand (i.e. Annual Consumption) 8,000 units
Stock holding cost as a percentage of average
Stock value (i.e. Inventory Carrying charges) 16%
Price per unit Tk. 5
Normal lead time 9 days
Safety stock 18 days
Maximum Usage 60 units
From the above, calculate:
(i) What is the quantity that should be ordered each time?
(ii) How many orders should be placed with the supplier during a year?
(iii) What would be the level of stock just before the material which has been ordered is received?
(iv) When should the material be ordered? (under certainty).
Page -43
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
EOQ = √ 2AO / C
= √ 2 x 125,000 x 36 / 4
= √ 22,50,000
= 1,500 units Ans.
2. Order point
Normal use per day (500 units) x Lead time ( 5 days) ………………………… 2,500 units
Add: Safety stock ……………………………………………………………………. 500 units
Order point ……………………………………………………………………………. 3,000 units Ans.
The supplier is willing to supply 1500 units at a discount of 5%, is it worth accepting
Page -44
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
Total cost (when order size is 1500 units) = Cost of 5,200 units + Ordering cost + Carrying cost.
5,200 units 1
=5,200 units × Tk. 475 + ----------------- x Tk. 100 + ------- × 1,500 units × 20% × Tk. 475
1,500 units 2
5,200 units 1
=5,200 units × Tk. 500 + ----------------- x Tk. 100 + ------- × 102 units × 20% × Tk. 500
102 units 2
Since, the total cost under quarterly supply of 1,500 unit with 5% discount is lower than that when order size is
102 units, therefore the offer should be accepted. While accepting this offer consideration of capital blocked
on order size of 1,500 units per quarter has been ignored.
(2)Minimum level of stock=Re-order level + Reorder quantity – Min. usage × Min. reorder period
=1,600 units + 102 units – 50 units × 6 weeks =1,402 units.
= 1,800 casting
Re-order point = Minimum stock level + Average lead time × Average consumption
= 150 + 6 × 150 = 1,050 castings.
Page -45
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
= 300 castings
(II)Total number of orders to be placed in a year are 180. Each order is to be placed after 2 days (1 year = 360
days). Under old purchasing policy each order is placed after 12 days.
Solutions of problem no. 06 : (materials)
Ans.
Stores Ledger(Material -B)
Under FIFO method
Receipts Issues Balance
Rate
Particulars / Rate per Amou Amou Rate per
Date Qnt. Qnt. per Qnt. Amount
Reference unit nt nt unit
unit
Unit Tk. Tk. Unit Tk. Tk. Unit Tk. Tk.
Feb. 01 Opening Balance - - - - - - - - -
Feb. 01 Purchases 100 1.00 100 - - - 100 1.00 100
Feb. 20 Purchases 100 2.00 200 - - - 100 1.00 100
100 2.00 200
Feb. 22 Issues for Job-W - - - 60 1.00 60 40 1.00 40
100 2.00 200
Feb. 23 Issues for Job-X - - - 40 1.00 80 2.00 160
40
60 80
2.00
20 40
Page -46
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
(b) No. of days for which Average inventory is held =Days in a year/ Inventory Turnover Ratio
= 360/2.5 = 144 Days
Notes:
1. Raw material consumed = Opening Stock + Purchases – Closing Stock
= 90,000 + 2,70,000 – 1,10,000= Tk. 2,50,000
2. Average Inventory = (Opening Stock + Closing Stock) / 2
= (90,000 + 1,10,000) / 2= Tk. 1,00,000
Solutions of problem no. 09 : (Inventory – E.O.Q)
(a) EOQ = √2 x A x O / C= √[2(50 x 365)] x 50 / (0.02 x 365)= √250,000= 500 units
(b) Re–order level = Maximum Consumption x Maximum Delivery Period= 50 x 32= 1,600 units
(i) Economic Order Quantity is the quantity that should be ordered each time:
2ܿ݀ Where,
EOQ = ඩ− − − c = Cost of placing each order
݅ d = Annual demand
i = Stock holding cost as a percentage of average stock value
p = Price per unit
2 ݔ4.5 ݔ8,000
−−−−−−−−−−−
=ඪ 16
−−ݔ5
100
72,000
= ඨ− − − − − −
0.6 ݔ5
= ඥ90,000
= 300 units.
௨ௗ
ii) Number of Orders to be placed in a year =
ாைொ
଼,
= = 27 orders.
ଷ
Page -48
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
CMA Professional Level –I
102:COA (Cost Accounting)
(iii) Safety stock is the level of stock immediately before the material ordered is received
Safety Stock = Average Usage x Period for which safety stock is kept
଼,
= x 18 days = 400 units
ଷ ௗ௬௦
(iv) When stock reaches the reorder level, material should be ordered.
Reorder Level = Maximum Usage x Maximum Lead Time = 60 x 9 days = 540 units.
The above gives us reorder level under certainty, since the above formula assumes that average usage and
lead time are constant
Page -49
Saturday, March 14, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com