Answer Paper

Cost Management Accounting Duration: 65

Details: Chapter 2 Marks: 35

Instructions:

 All the questions are compulsory

 Properly mention test number and page number on your answer sheet, Try to
upload sheets in arranged manner.
 In case of multiple choice questions, mention option number only Working notes are
compulsory wherever required in support of your solution
 Do not copy any solution from any material. Attempt as much as you know to fairly
judge your performance.
Ans-1

Basic Data:

A (Number of units to be purchased annually) = 5,000 units

O (Ordering cost per order) = Rs. 40

C (Annual cost of storage per unit) = Rs. 10

Purchase price per unit inclusive of transportation cost = Rs.100

(i) Re-order Level (ROL) =Maximum usage per period X Maximum Re-order Period
= (40 X 15) = 600 units per day

(ii) Maximum Level = ROL+ROQ –(Min Rate of Consumption X Min Re-order Period)

= 600 units +200 units-(20 units per day X 6 days)

= 680 units

(iii) Minimum level =ROL –(Average Rate of Consumption X Average Re-order Period )

=600 – (30 units per day X 10 days)

=300 units

(iv) Danger Level =Average Consumption X Lead time for Emergency Purchases

= 30 units per day X 4 days

= 120 units

Working note:

2×5000 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 ×40

Re-order Quantity (ROQ)= √ = 200 units
10

Minimum rate of consumption per day

Minimum rate of consumption+Maximum rate of consumption

Av. rate of consumption= 2

X units / day + 40 units per day

30 units per day = 2
= 20 units per day.

(5 Marks)

Ans-2

(i) (a) Stores Ledger Account for the month of April, 2023 (Weighted Average Method)

Receipt Issue Balance

Date Qty Units Rate Amount Qty Units Rate Amount Qty Units Rate Amount

(`) (`) (`) (`) (`) (`)

1-4-23 _ _ _ _ _ _ 1,000 15.00 15,000

4-4-23 3,000 16.00 48,000 _ _ _ 4,000 15.75 63,000

8-4-23 _ _ _ 1,000 15.75 15,750 3,000 15.75 47,250

15-4-23 1,500 18.00 27,000 _ _ _ 4,500 16.50 74,250

20-4-23 _ _ _ 1,200 16.50 19,800 3,300 16.50 54,450

25-4-23 _ _ _ 300 18.00 5,400 3,000 16.35 49,050

26-4-23 _ _ _ 1,000 16.35 16,350 2,000 16.35 32,700

28-4-23 500 17.00 8,500 _ _ _ 2,500 16.48 41,200

30-4-23 _ _ _ 50 16.48 824 2,450 16.48 40,376

(b) Stores Ledger Account for the month of April, 2019 (LIFO)

Date Qty Units Rate Amount Qty Units Rate Amount Qty Units Rate Amount
(`) (`) (`) (`) (`) (`)
1-4-23 _ _ _ _ _ _ 1,000 15 15,000
4-4-23 3,000 16 48,000 _ _ _ 1,000 15 15000
3,000 16 48,000
8-4-23 _ _ _ 1,000 16 16,000 1,000 15 15,000
2,000 16 32,000
15-4-23 1,500 18 27,000 _ _ _ 1,000 15 15,000
2,000 16 32,000
1,500 18 27,000
20-4-23 _ _ _ 1,200 18 21,600 1,000 15 15,000
2,000 16 32,000
300 18 5,400
25-4-23 _ _ _ 300 18 5,400 1,000 15 15,000
2,000 16 32,000
26-4-23 _ _ _ 1,000 16 16,000 1,000 15 15,000
1,000 16 16,000
28-4-23 500 17 8,500 _ _ _ 1,000 15 15,000
1,000 16 16,000
500 17 8,500
30-4-23 _ _ _ 50 17 850 1,000 15 15,000
1,000 16 16,000
450 17 7,650
(ii)Value of Material Consumed and Closing Stock

Weighted Average LIFO method(`)

method (`)
Opening stock as on 01-04-2023 15,000 15,000
Add: Purchases 83,500 83,500
98,500 98,500
Less: Return to supplier 5,400 5,400
Less: Abnormal loss 824 850
Less: Closing Stock as on 30-04-2023 40,376 38,650
Value of Material Consumed 51,900 53,600
(8 Marks)

Ans-3

(i) Statement of Total Inventory Cost and Ranking of items

 Item code Units % of Total Unit cost Total Inventory % of Total Ranking
no. units (`) cost (`) Inventory cost

101 25 3.33 50 1,250 16.67 2

102 300 40.00 1 300 4.00 6

103 50 6.67 80 4,000 53.33 1

104 75 10.00 8 600 8.00 4

105 225 30.00 2 450 6.00 5

106 75 10.00 12 900 12.00 3

750 100 153 7,500 100

(ii) Classifying items as per ABC Analysis of Inventory Control

Basis for ABC Classification as % of Total Inventory Cost

15% & above — ‘A’ items

7% to 14% — ‘B’ items

6% & Less — ‘C’ items

Ranking Item code % of Total Total Inventory % of Total Category

No. units cost (`) Inventory

Cost
 1 103 6.67 4,000 53.33

2 101 3.33 1,250 16.67

Total 2 10.00 5,250 70.00 A

3 106 10.00 900 12.00

4 104 10.00 600 8.00

Total 2 20.00 1,500 20.00 B

5 105 30.00 450 6.00

6 102 40.00 300 4.00

Total 2 70.00 750 10.00 C

Grand Total 6 100 7,500 100

(8 Marks)

Ans-4

Date Receipts Qty Rate FIFO Method LIFO Method

(units) (Rs.)
Issue Qty Rate Issue Qty Rate
(Units) (units)
(Rs.) (Rs.)

May 2023
1 Opening 500 25 - - - - -
Balance

3 - - - To Production 70 25 To 70 25
Production

4 - - - To Production 100 25 To 100 25

Production

8 - - - To Production 80 25 To 80 25
Production

13 From Supplier 200 24.5 - - - - - -

14 Returned to 15 24 - - - - - -
stores

15 - - - (Shortage) 5 25 (Shortage) 5 24

16 - - - To Production 180 25 To 10 24
Production
(180) 170 24.5

20 From Supplier 240 24.75 - - - - - -

24 - - - To Production 65 25 To 240 24.75

(304) Production
200 24.5 (304) 30 24.5

15 24 34 25

24 24.75

25 From supplier 320 24.5

26 - - - To Production 112 24.75 To 112 24.5

Production

27- - - (Shortage) 8 24.75 (Shortage) 8 24.5

 27Returned 12 24.5 - - - - - -
Stores

28 From Supplier 100 25 - - - - - -

FIFO Method LIFO Method

Units Rs. Units Rs.

Total Issued to production 846 21,001 846 20,924

Less: Returns 27 654 27 654

Net Cost of Consumption 819 20,347 819 20,270

Closing inventory value 13,010 13,094

Opening inventory value 12,500 12,500

Total 25,510 25,594

Average inventory at cost = Rs. 25,510/2 = 12,755 = Rs. 25,594/2 = 12,797

Inventory Turnover Ratio = Material Cost of Sales

Average Inventory
 Rs. 20,347 Rs. 20,270
𝑅𝑅𝑅𝑅. 12,755 𝑅𝑅𝑅𝑅. 12,797

= 1.595 or 1.6 = 1.584 or 1.6

Working Notes:

(i) alculation of closing inventory value

96 @ 24.75 = Rs. 2,376 316@ 25 = Rs. 7,900

320 @ 24.5 = Rs.7,840 212 @ 24.5 = Rs.5,194

12 @ 24.5 = 294

100 @ 25 = 2,500

528 Rs. 13,010 528 Rs. 13,094

(ii) Calculation of value issued to production

495 @ 25 = Rs. 12,375 284 @ 25 = Rs. 7,100

200 @ 24.5 = 4,900 10 @ 24 = 240

15 @ 24 = 360 312 @ 24.5= 7,644

136 @ 24.75= 3,366 240 @ 24.75= 5,940

846 Rs. 21,001 846 Rs. 20,924

Conclusion: Inventory turnover ratio (1.595) under FIFO method shows a more favourable
situation.

(6 Marks)
Ans-5
Computation of cost per unit

(Rs.)

Net purchase Price 1200.00

Add: Packing charges (5 non-returnable boxes) 50.00

1250.00

No. of units purchased 300 units

Cost per unit 4.16

Note: (i) Cash discount is treated as interest and finance charges, hence, it is not considered
for valuation of material.

(ii) Input credit is available for GST paid; hence it will not be added to purchase cost.

(3 Marks)

Q-6 MCQ’s Answer

1. (a) Last-in-first-out price

Reason:

The Last-in-first-out (LIFO) pricing method assumes that the most recently acquired inventory
items are the first to be sold. This means that older inventory items, which may have been
purchased at lower costs, are left in the inventory, causing costs to lag behind the current
economic values. LIFO is typically used for tax purposes and can result in lower reported
profits during periods of inflation due to the mismatch between current market prices and
the older, lower-cost inventory values. Therefore, option (a) is the correct answer as it
represents a method where costs tend to lag behind the current economic values.

2. (d) Standard Price Method

Reason:

The Standard Price Method involves pricing materials at predetermined rates or standard
prices, taking into account factors such as current prices, anticipated market trends, discounts
available, and transport charges. It is a useful method for controlling material costs and
assessing the efficiency of the purchase department. The standard prices are fixed for each
material, and requisitions are priced at these standard rates. In cases of highly fluctuating
material prices, it may be challenging to establish standard costs on a long-term basis.
Therefore, option (d) represents this method, making it the correct answer.

3. (c) EOQ represents the size of an order for which the total of ordering and carrying costs is
minimized, and it is calculated by considering factors like ordering costs, employee costs, and
transportation costs.

Reason:

EOQ, or Economic Order Quantity, represents the order quantity that minimizes the total cost
of inventory, which includes both ordering costs and carrying costs. To determine the EOQ,
factors such as ordering costs (e.g., cost to invite quotations, preparation of purchase orders,
transportation, and inspection costs) and carrying costs (e.g., cost of funds invested in
inventory, storage costs, insurance costs) are considered. The goal is to find the order quantity
where the total cost (ordering cost + carrying cost) is at a minimum. Therefore, option (c)
correctly describes what EOQ represents and how it is determined in the context of inventory
management.

4. (b) BOM specifies standard quantities and qualities of materials needed for production, and
it is shared with departments like Marketing, Production, Store, and Cost/Accounting for
various planning and operational activities.

Reason:
A Bill of Materials (BOM) is a comprehensive list detailing the standard quantities and qualities
of materials and components necessary for producing a product or completing a job. It is
prepared by the product development team (engineering or planning department) and is
shared with multiple departments, including Marketing, Production, Store, and
Cost/Accounting. The primary purpose of the BOM is to provide essential information to these
departments for planning, production, inventory management, and cost analysis. Option (b)
correctly captures the multifaceted utility of the BOM within an organization.

5. b) Rs. 12

Reason:

Under the Simple Average Price Method, the issue price is calculated by taking the average of
the purchase prices for the materials. In this case, the total cost of purchases is calculated as:

(200 units @ 10) + (150 units @ 12) + (210 units @ 12) + (50 units @ 15) + (140 units @ 11) =
2000 + 1800 + 2520 + 750 + 1540 = Rs.8810

The total quantity of units purchased is 200 + 150 + 210 + 50 + 140 = 750 units.

So, the issue price is 8810 ÷ 750 = 11.73 (approximately).

However, the Simple Average Price Method typically rounds the issue price to the nearest
whole number. In this case, the issue price would be rounded to Rs.12. Therefore, option (b)
is the correct answer.

(1 × 5 = 5 Marks)