Unit – II

Material
Maintenance of Stock level

1. Maximum stock level

= Re-order level + Re-order Quantity – ( Minimum consumption X
Minimum Re-order period)
2. Minimum stock level
= Re-order level – (Normal Consumption X Normal Re order period)

Normal Consumption = (Maximum consumption + Minimum Consumption) / 2

Normal Re – order period = (Maximum re-order period + Minimum Re-

order period) / 2
3. Re-order level

= Maximum Re-order period X Maximum consumption per day or week

4. Danger Level

= Minimum consumption X Maximum Re-order period for emergency purchase

Exercise:1 Material A and B are used in a company on the following basis:

Maximum usage – 200 units per week each

Minim usage - 80 units per week

Normal usage - 140 units per week each

Re-order quantity – A 900 units; B 1100 nits

Re-order period – A: 3 to 6 weeks B: 2 to 4 weeks

Calculate: a) Maximum level b) Minimum level c) Re-order level

Solution:
a) Re-order level
= Maximum consumption X Maximum re order period
A = 200 X 6 = 1 200 units
B =200 X 4 = 800 units
b) Maximum level
= Re-order level + Re-order quantity – ( Minimum consumption
X Minimum reorder period )
A= 1 200 + 900 – (80 X 3)
= 2100 – 240
=1860 units
B = 800 + 1100 – (80 X2)
=1900 – 160
= 1740 units
iii) Minimum Level
= Re-order level – ( Normal consumption X Normal
Re-order period)
A= 1200 – (140 X (3+6)/2)
= 1200 – 630
 = 570 units
B = 800 – (140 X ( 2 + 4) / 2)
= 800 – 420
= 380 Units
Exercise:2 Material X and Y are used in a company as
follows:
Particulars Material X Material Y
( Units) ( Units)
Maximum usage per month 1 000 1 500
Minimum usage per month 400 900
Normal usage per month 800 1 100
Re-order quantity 2 100 3 800
Re-order period 1 to 3 M 2 to 4 M
Calculate for each material (a) Maximum level b)
Minimum level c) Re-order period and d) Average
stock level
1)Re-order level
= Max.Consumption x Maximum Re-order period
Material X= 1000 x 3 = 3 000 units
Material Y = 1 500 x 4 = 6 000 units
2)Maximum level
= Re-order level + Re-order quantity – (Min.consumption x
Min. reorder period)
Material X = 3 000 + 2100 – (400 x 1)
= 5100 – 400
= 4 700 units
Material Y = 6 000 + 38 00 – ( 900 x 2)
= 9 800 – 1800
= 8 000 units
iii) Minimum level
=Re-order level – (Normal consumption x Normal reorder
period)
Material X= 3 000 – (800 x 1+3/2)
= 3 000 - 1 600
= 1 400 units
Material Y = 6 000 – (1 100 x 2+4/2)
= 6 000 – 3 300
= 2 700 units
iv) Average stock level
= Maximum level + Minimum level / 2
Material X = 4700+1400 / 2
= 3 050 units
 Material Y = 8 000 + 2 700 / 2
= 5 350 units
Exercise 3: The usage of material X, Y and Z in a
company is as follows:
Maximum usage – 500 units per week each
Minimum usage – 200 units per week each
Normal usage - 350units per week each
Re-order quantity- X- 2200 units, Y -2000 units Z-2500
units
Re-order period – X- 2 to 4 weeks; Y- 3 to 6 weeks ;
Z - 1 to 3 weeks
Calculate for each material 1.Maximum level 2.Minimum
level 3. Re-order level 4. Average stock level.
Inventory Turnover ratio
Inventory turnover ratio is otherwise called as stock
turnover ratio or stock velocity. It is the ratio between the
cost of raw material consumed in a year and the average
stock of material in a year. It shows the rate of movement
of materials for producing.
Inventory turnover ratio = Cost of raw material consumed
during the year / Average stock of raw material
Cost of raw material = opening stock of material +
purchase of material – closing stock of material
Average stock of raw material = Opening stock of raw
material + Closing stock of raw material / 2
Average material holding or Turnover period can be
calculated as follows:
Average material holding = 365 days / Inventory
Turnover ratio
Exercise 4: Calculate Stock turnover ratio and turnover
period from the following:
Material X (Rs) Material Y(Rs)
Opening Stock 6 000 12 000
Purchases 44 000 56 000
Closing Stock 10 000 8 000
Material Consumed = Opening stock + purchase –
Closing stock
Material X = 6 000 + 44 000 – 10000
= Rs.40 000
Martial Y = 2 000 + 56 000 – 8 000
= Rs. 60 000
Average Stock= Opening stock of RM + Closing stock of
RM / 2
Material X = 6 000 + 10 000 / 2
= Rs. 8 000
Material Y = 12 000 + 8 000 / 2
= Rs. 10 000
Stock turnover ratio = Material consumed / Avg. stock
Material X = 40 000 / 8000
= 5 times
Material y = 60 000 / 10 000
= 6 times
Turnover period = 365 days / Turnover Ratio
Material X = 365 / 5
= 73 Days
Material Y = 365 / 6
= 60.833333 (or) 61 Days
Exercise 5: Calculate Stock turnover ratio and Turnover
period from the following.
Material A (Rs) Material B (Rs)
Opening stock 5 000 11 000
Pururchase 60 000 74 000
Closing Stock 8 000 9 000

PRICING OF MATERIALS
I. Actual Price Method
II. Average Price Method
III. Other Methods
Actual Price Method:
a) First in First out (FIFO)
b) Last in First out (LIFO)
c) Specific Price Method
d)Base stock
e) Highest in first out(HIFO)
B)Average Price Method
a)Simple average
b) Weighted average
 c) Periodic simple average
d) Periodic weighted average
C) Other Method
a) Standard Price Method
b) Master Price Method
c) Inflated Price Method
FIRST IN FIRST OUT METHOD (FIFO)
This method of purchasing is based on the principle that the material
purchased first are issued to the production centre first. The material
issue price is charged as per the price of the first consignment. If the
quantity of the first consignment is exhausted completely then the price
at which the next consignment purchased is taken into account for the
issue price.
Format
Stores Ledger Account (FIFO)
Date Particulars Receipts Issue Balance
Qty Rate Amt Qty Rate Amt Qty Rate Amount
Jan 1 Balance 600 10 6 000
2021
100 12 1 200 --- ----- ----- 600 10
Jan 2 Receipts 100 12 7 200
Issued --- ---- ---- 500 10 5 000
Jan 3 100 10 1 000
100 12 1 200
Exercise1: A manufacturing company is producing product X with the help of
raw material A. The details regarding the receipts and issues of materials in a
factory during January and February 2019 are stated as follows:

Jan 1 Opening Balance 600 units @ Rs. 20 per unit

Jan 6 Received 400 units @Rs. 22 per unit

Jan 10 Issued 700 units

Jan 18 Issued 200 units

Jan 20 Received 500 units @ Rs25 per unit

Feb 1 Issued 400 units

Feb 5 Issued 100 units

Feb 10 received 400 units @ Rs. 30 per unit

Feb 15 Issued 300 units

Prepare Stores Ledger Account on the basis of First in First out method.

Solution
Stores Ledger Account (FIFO)
Date Particulars Receipts Issue Balance
Qty Rate Amt Qty Rate Amt(Rs) Qty Rate Amount
Jan 1 Balance 600 20 12 000
Jan 6 Receipts 400 22 8 800
600 20 12 000 600 20
Jan 10 Issued 400 22 20 800
100 22 2 200
300 22 6 600
Jan 18 Issued 200 22 4 400
500 25 1 2 500 100 22 2 200
Jan 20 Receipts
100 22
Feb 1 Issued 100 22 2 200 500 25 12 500
300 25 7 500
Feb 5 Issued 400 30 12 000 100 25 2 500 200 25 5 000
100 25 2 500
Feb 10 Receipts
100 25
Feb 15 Issued 100 25 2 500 400 30 14 500
200 30 6 000
200 30 6 000
Last in First out (LIFO)
In this method, the price of the last purchase is taken into
account for the issue price of the materials. When the
quantity of last batch is exhausted completely then, the
next previous purchase price is considered for the issue
price.
Exercise 2: The following information are related to
material purchase and issue of a manufacturing company
for the month of April 2019.
April 1 Balance 600 units @ Rs. 50 per unit
April 4 Purchased 300 units @ Rs.45 per unit
April 5 Issued 400 units
April 7 Purchased 500 units @ Rs. 60 per unit
April 12 Issued 600 units
April 15 issued 200 units
 April 19 Purchased 400 units @ Rs. 65 per unit
April 25 Issued 200 units
April 26 Returned to store 50 units( Issued on 12th April)
April 28 Issued 200 units
April 29 Purchased 300 units @ Rs. 55 per unit
April 30 Issued 450 units.
Prepare stores Ledger Account on the basis of LIFO
method.
Stores Ledger Account (LIFO)
Date Particulars Receipts Issue Balance
Qty Rate Amt Qty Rate Amt(Rs) Qty Rate Amount
April 1 Balance 600 50 30 000
April 4 Received 300 45 13 500 600 50
300 45 43 500
April 5 Issued 300 45 13 500
100 50 5 000
500 50 25 000
April 7 Purchased 500 60 30 000
500 50
500 60 55 000
April 12 Issued 500 60 30 000
100 50 5 000
400 50 20 000
April 15 Issued 400 65 26 000 200 50 10 000
April 19 Purchased 200 50 10 000
200 50
April 25 Issued 200 65 13 000 400 65 36 000
 50 60 3000
April 26 Returned to 200 50
store 200 65 23 000
200 50
April 28 Issued 50 60 3000 200 65
150 65 9 750 50 60 26 000
300 55 16 500
April 29 Received 200 50
50 65 13 250

April 30 Issued 300 55 16 500 200 50

50 65 3 250 50 65
100 50 5 000 300 55 29 750

100 50 5 000

Simple Average Price Method

In this method, the average of the prices of previous
purchases should be considered as the issue Price of the
material. If the quantity of material issued for a period
exceeds the earlier purchase, then the price of that
purchase should not be considered for calculating the
average price.
Exercise 3
The following information are provided by a
manufacturing company.
2019 March 1 Balance of material 400 units @ Rs.15 per
unit
Marc3 Purchased 300 units @ Rs.20 per unit
March 5 Issued 300 units
March 6 Issued 100 units
March 15 Purchased 500 units @ Rs.18 per unit
March 20 Issued 200 units
March 25 Purchased 300 units @ Rs.22 per unit
March 27 Issued 200 units
Prepare Stores Ledger Account on the basis of
Simple Average Price method.
Solution
Stores Ledger Account (Simple Average Method)
Date Particulars Receipts Issue Balance
Qty Rate Amt Qty Rate Amt(Rs) Qty Rate Amount
2019
March 1 Balance 400 15 6 000
March 3 Purchased 300 20 6 000 700 12 000
Issued 300 17.5 5 250
March 5 400 6 750
Issued 100 17.5 1 750
March 6 300 5 000
500 18 9 000
March 15 Purchased 800 14 000
200 19 3 800
Marc 20 Issued 600 10 200
300 22 6 600
March 25 Purchased 900 16 800
200 20 4 000
March 27 Issued 700 12 800

Note:
i) Issue Price for 5 & 6 March = (20+15)/2 =
Rs.17.50
ii) Issue Price for 20th march = (20+18)/2=Rs.19
iii) Issue Price for 27th March =(20+18+22)/3=Rs.20
Weighted Average Price Method

Under this method, the issue price of material is calculated by dividing the
total cost of available material in the store with the total quantity of material. This
price should be calculated every time of purchases of material. This method fairly
represents the cost of the stock and cost of issue of material.

Exercise:4 The following information are provided by a manufacturing company

for the month of January 2019 with respect to the purchase and issue of materials.

Jan 1 Balance of material 500 units @ Rs.20 per unit

 Jan 4 Purchased 400 units @ Rs.25 per unit

Jan 5 Issued 600 units

Jan 7 Purchased 500 units @ Rs.22 per unit

Jan 10 Issued 400 units

Jan 18 Purchased 300 units @ Rs.26 per unit

Jan 25 Issued 500 units

Jan 28 Purchased 500 units @ Rs.30 per unit

Jan 30 Issued 600 units

Prepare Stores Ledger Account on the basis of weighted Average Price

method of charging the issue price.

Stores Ledger Account (Weighted Average Price Method)

Date Particulars Receipts Issue Balance
Qty Rate Amt Qty Rate Amt Qty Rate Amount
2019
Jan 1 Balance 500 20 10 000
Jan 4 Purchase 400 25 10 000 900 22.22 20 000
Issue 600 22.22 13 320
Jan 5 300 22.22 6 680
Purchased 500 22 11 000
Jan 7 800 22.1 17 680
400 22.1 8 840
Jan 10 Issued 400 22.1 8 840
300 26 7 800
Jan 18 Purchase 700 23.77 16 640
500 23.77 11 885
Jan 25 Issued 200 23.77 4 755
500 30 15 000
Jan 28 Purchase 600 28.22 16 932 700 28.22 19 755
Jan 30 Issue 100 28.22 2 823
Note: Issue Price
10000 + 10000 = 20 000 / 900 = 22.22
17 680 / 800 = 22.1
16 640 / 700 = 23.77 19 755 / 700 = 28.22
ABC Analysis

ABC analysis is otherwise called as Always Better Control analysis. This is a

method of inventory control. Under this method, the materials are grouped into
high priced, medium priced and low priced materials for controlling the materials.
High priced material is termed as A; medium priced material is termed as B and
low priced material is termed as C. According to this method, the high priced
material(A) constitute high value say, 70-75% of the total value of material; and
low quantity say 5 – 10 % of the total quantity of material. The medium priced
material (B) constitute 15 -20% of quantity as value of the total material.

Economic Ordering Quantity (EOQ)

Economic ordering quantity is the optimum quantity at which the material ordering
cost is equal to the material carrying cost. Material ordering cost is the cost
connected with the ordering and receiving of material. When small quantity of
material is purchased ordering cost will increase, since many orders have to be
placed in a year. When huge quantity of material is purchased, number of orders
will be reduced and thereby it reduces the ordering cost in a year. Hence ordering
cost favours large quantity of purchase at a time, to reduce the cost. Carrying cost
is the cost of manufacturing the material. It includes the store house rent, interest
for the value of material kept in the storehouse etc. The material ordering cost
equals to material carrying cost.
The EOQ is calculated through the following formula:

EOQ = Square root of (2AO) / C

A= Annual consumption

O = Ordering cost per order

C= Inventory carrying cost per unit per year

Exercise: 5 The annual consumption of material in a factory is 5000 units. The

interest and carrying cost is 10% of the cost of material. Cost per unit is Rs. 20.
Cost of placing an order is Rs.50. Find out the Economic Ordering quantity.

Solution

EOQ = Square root of (2AO) / C

A = 5000 units

O = Rs.50

C= 10% of Rs.20 = Rs.2 ( 20 x 10 / 100)

EOQ= Square root of (2 x 5000 x 50) / 2

= 500 units

Exercise: 6 Calculate Economic ordering quantity where annual consumption is 1

00 000 units, ordering cost is Rs.100 and carrying cost is 20% of the cost of
material. Total annual cost of consumption is Rs.2 50 000

EOQ= Square root of ( 2AO / C)

A = Rs.1 00 000

O – 100

C = 20 % of 2 50 000 / 1 00 000

= Rs. 0.5
= Square root of (2x 100 000 x 100) / 0.5

= 20 000 Units

Inventory Turnover Ratio

Inventory Turnover ratio is otherwise called as stock turnover ratio or stock

velocity. It is the ratio between of raw material consumed in a year and the average
stock of material in a year. It shows the rate of movement of materials for
production.

Inventory Turnover ratio = Cost of raw material consumed during the year /
Average stock of raw material

Cost of Raw material = Opening stock of material + Purchase of material – Closing

stock of material

Average stock of Raw Material = (Opening stock + Closing Stock) / 2

Average material holding = 365 / Inventory Turnover ratio

Exercise 7: Calculate stock turnover ratio and turnover period from the following
Material A (Rs) Material B(Rs)

Opening Stock 6 000 12 000

Closing Stock 10 000 8 000

Purchases 44 000 56 000

Solution

Cost of RM = Opening stock + Purchase - Closing stock

Material A = 6 000 +44 000 – 10 000

= Rs. 40 000
Material B = 12 000 + 56 000 – 8 000

= Rs. 60 000

Average Stock = Opening stock + Closing stock / 2

Martial A = 6 000 + 10 000 / 2

= Rs. 8 000

Material B = 12 000 + 8 000/ 2

= Rs. 10 000

Stock Turnover Ratio:

Inventory Turnover ratio = Cost of raw material consumed during the year /
Average stock of raw material

Material A = 40 000 / 8 000

= 5 times

Material B = 60 000 / 10 000

= 6 times

Turn over period = 365 days / Turnover ratio

Material A = 365 / 5 = 73 days

Material B = 365 / 6 = 61 days

Exercise 8: Calculate stock turnover ratio and turnover period from the following

Material A (Rs) Material B(Rs)

Opening Stock 5 000 11 000

Closing Stock 8 000 9 000

Purchases 60 000 74 000

Exercise 9 : Calculate Economic Ordering quantity when annual consumption is
Rs. 9 00 000, cost of placing and receiving an order is Rs. 200 and annual carrying
cost is 10%