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102.03 Costing and Control of Materials
102.03 Costing and Control of Materials
102.03 Costing and Control of Materials
102.03
Costing and
Control of Materials
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.
Metals
Ferrous metals and alloys (irons, carbon steels,
alloy steels, stainless steels, tool and die steels)
Nonferrous metals and alloys (aluminum, copper,
magnesium, nickel, titanium, precious metals,
refractory metals, superalloys)
Ceramics
Glasses
Glass ceramics
Graphite
Diamond
Polymeric
Thermoplastics plastics
Thermoset plastics
Elastomers
Composites
Reinforced plastics
Metal-matrix composites
Ceramic-matrix composites
Sandwich structures
Concrete
Purchasing Procedure e
(1) Specification of Material.
(2) Purchase Requisition.
(3) Selection of Suppliers.
(4) Purchase Orders.
(5) Goods Received Note.
(6) Inspection of Materials.
Page - 25
Friday, March 07, 2014
Md.Monowar Hossain FCMA, CPA, ACS, ACA
Audit Consultant (General Manager), Rupali Bank Ltd.
eMail: md.monowar@gmail.com
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
Friday, March 07, 2014
Md.Monowar Hossain FCMA, CPA, ACS, ACA
Audit Consultant (General Manager), Rupali Bank Ltd.
eMail: md.monowar@gmail.com
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.
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 level + (Average usage x Average Lead time)
2) Minimum Stock Level : It represent Minimum Qty of stock which should be maintained by Organization
Minimum level = Reorder level (Average usage x Average lead time)
3) Maximum Stock Level : It represent m
maximum Qty of stock which should be maintained by Organization.
Maximum level = Reorder level + Reorder quantity (Minimum usage x Minimum lead time)
Page - 27
Friday, March 07, 2014
Md.Monowar Hossain FCMA, CPA, ACS, ACA
Audit Consultant (General Manager), Rupali Bank Ltd.
eMail: md.monowar@gmail.com
365
.
Inventory Turnover Ratio
Where
A = Annual Consumption of Qty
B = Buying cost OR cost of placing one
order.
CS = Cost of storing one unit of material
for 1 year.
If the cost of the Investment is given then
such cost also will be part of CS
Note :- Whenever Discount Factor given in
a problem. These Formula will not be apply
for calculating EOQ.
15) Safety Stock = Annual Demand xx(Maximum lead time - Average lead time)
365
16) Total Inventory cost = Ordering cost + Carrying cost of inventory +Purchase cost
17) Input Output Ratio = Quantity of input of material to production
Standard material content of actual output
Remarks : 1) High Inventory Turnover Ratio indicates that the material in the question is fast moving
2) Low Inventory Turnover
urnover Ratio indicates over investment and locking up of working Capital
in inventories
Page - 28
Friday, March 07, 2014
Md.Monowar Hossain FCMA, CPA, ACS, ACA
Audit Consultant (General Manager), Rupali Bank Ltd.
eMail: md.monowar@gmail.com
Reorder Period OR
Delivery Period OR
Lead Time :- It represent the time gap involves between placement of
order & Actual Receiving of the Delivery. Such Period is again divided into
Maximum Period, Minimum Period, Average Period & Emergency Period.
Total cost
Total No. of units
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)
d) Periodic weighted average price method = Total cost of certain period
Total Number of units of that period
e) Moving simple average price method
= Total of periodic simple average of certain number of periods
Number of periods
f) Moving weighted average price method
= Total of periodic weighted average of certain number of periods
Number of periods
3) Market price method:a) Replacement price method = Issues are valued as if it was purchased now at current market price
b) Realizable price method = Issues are valued at price if it is sold now
4) Notional price method:a) Standard price method = Materials are priced at pre determined rate (or) Standard rate
b) Inflated price method = The issue price is inflated to cover the losses incurred due to natural (or)
climatic losses
5) Re use price method = When materials are returned (or) rejected it is valued at different price.
There is no final procedure for this method.
ABC Analysis (or) Pareto Analysis :- In this materials are categorized into
Particulars
A Important material
B Neither important nor unimportant
C Un-important
Quantity
10%
20%
70%
Value
70%
20%
10%
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.
Page - 30
Friday, March 07, 2014
Md.Monowar Hossain FCMA, CPA, ACS, ACA
Audit Consultant (General Manager), Rupali Bank Ltd.
eMail: md.monowar@gmail.com
Inventory Planning:
Page - 31
Friday, March 07, 2014
Md.Monowar Hossain FCMA, CPA, ACS, ACA
Audit Consultant (General Manager), Rupali Bank Ltd.
eMail: md.monowar@gmail.com
Page - 32
Friday, March 07, 2014
Md.Monowar Hossain FCMA, CPA, ACS, ACA
Audit Consultant (General Manager), Rupali Bank Ltd.
eMail: md.monowar@gmail.com
The reorder point is the level of inventory when a fresh order should be made with suppliers to bring the
inventory up by the EOQ.
Page - 33
Friday, March 07, 2014
Md.Monowar Hossain FCMA, CPA, ACS, ACA
Audit Consultant (General Manager), Rupali Bank Ltd.
eMail: md.monowar@gmail.com
Page - 34
Friday, March 07, 2014
Md.Monowar Hossain FCMA, CPA, ACS, ACA
Audit Consultant (General Manager), Rupali Bank Ltd.
eMail: md.monowar@gmail.com
(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.
Question-08: Give three problems met in determining the economic order quantity.
(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
(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
Page - 35
Friday, March 07, 2014
Md.Monowar Hossain FCMA, CPA, ACS, ACA
Audit Consultant (General Manager), Rupali Bank Ltd.
eMail: md.monowar@gmail.com
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
Advantages of LIFO Costing
Following advantages are associated with LIFO costing method:
The rationale of charging most recent costs to the current period production and be compared to the
current period revenues results in a systematic and realistic pricing of material consumed.
Another benefit of LIFO costing is that it minimizes the unrealized gains and losses of inventory and
industries facing fast material price fluctuations can stabilize their reported operating profits.
As in LIFO costing current period inflationary prices of raw material are charged to cost of production
and are deducted from revenues, therefore it reduces the profit figure resulting in tax savings. This cash
saving advantage enhances the working capital of the firm.
Disadvantages of LIFO Costing
Following disadvantages are associated with LIFO costing method:
Regulatory bodies often adopt strict measure as a check over LIFO method. In some cases LIFO
costing technique is even restricted due to reduction in tax collections to the internal revenue services.
Record keeping requirements under LIFO are substantially higher than any other method of inventory
costing.
Deterioration or decay of material is maximized due to early use of the latest purchases and latest use
of the oldest receipts.
The Cost Accounting Standards Board does not recognize the use of LIFO method except in some
special cases.
Due to accelerated rate of inflation in the last few years the adoption of LIFO costing technique gained
some appeal from industries but the decision to adopt LIFO should be taken abruptly without keeping
its long term repercussions.
:
:
6
75%
7
10%
8
5%
9
5%
10
5%
Required:
(I) Compute the economic order quantity (EOQ).
(ii) Assume the company is willing to assume a 15% risk of being out of stock. What would be the safety stock?
The re-order point?
(iii) Assume the company is willing to assume a 5% risk of being out of stock. What would be the safety stock?
The re-order point?
(iv) Assume 5% stock-out risk. What would be the total cost of ordering and carrying inventory for one year?
(v) Refer to the original data. Assume that using process re-engineering the company reduces its cost of
placing a purchase order to only Tk. 600. In addition company estimates that when the waste and inefficiency
caused by inventories are considered, the true cost of carrying a unit in stock is Tk.720 per year.
(I)Compute the new EOQ.
(II) How frequently would the company be placing an order, as compared to the old purchasing policy?
Problem No. 06 : (Materials)
The following information is extracted from the store ledger:
Material B
Date
Descriptions
Feb. 01
Opening stock
Nil
Feb. 01
Purchases
100 units @ Tk. 1 per unit
Feb. 20
Purchases
100 units @ Tk. 2 per unit
Feb. 22
Issues for production
60 units for Job No. W
Feb. 23
Issues for production
60 units for Job No. X
Complete the receipts and issues valuation by adopting the First In First Out (FIFO), Last In Last Out (LIFO)
and the Weighted Average Method.
Problem No. 07 ( Materials)
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:
Raw materials
Works in progress
Finished goods
01 Aug-13
(Tk.)
8,000
10,500
17,600
31-Aug-13
(Tk.)
10,600
14,500
19,000
Page - 38
Friday, March 07, 2014
(Tk.)
3,500
2,500
75,000
The following data are available in respect of material X for the year ended 31 December 2013:
Opening Stock
Tk. 90,000
Purchases during the year
2,70,000
Closing stock
1,10,000
Calculate: a. Inventory turnover ratio
b. The number of days for which the average inventory held.
Problem No. 09: (Inventory E.O.Q)
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.
Compute: (a) Economic Order Quantity
(b) Re-order level
Problem No.10: (Application of Cost Concept)
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 companys 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 - 39
Friday, March 07, 2014
Md.Monowar Hossain FCMA, CPA, ACS, ACA
Audit Consultant (General Manager), Rupali Bank Ltd.
eMail: md.monowar@gmail.com
EOQ = 2AO / C
= 2 x 125,000 x 36 / 4
= 22,50,000
= 1,500 units Ans.
1.
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.
3,000 units
2,500
500 units
1,500
2,000 units Ans.
3,000 units
500
2,500 units
1,500
4,000 units Ans.
= 5,200 tubes
Page - 40
Friday, March 07, 2014
Md.Monowar Hossain FCMA, CPA, ACS, ACA
Audit Consultant (General Manager), Rupali Bank Ltd.
eMail: md.monowar@gmail.com
= 1,800 casting
(ii) Safety stock (Assuming a 15% risk of being out of stock)
Safety stock for one day = 54,000/360 days = 150 castings
Re-order point = Minimum stock level + Average lead time Average consumption
= 150 + 6 150 = 1,050 castings.
(iii) Safety stocks (Assuming a 5% risk of being out of stock)
Safety stock for three days = 150 3 days = 450 castings
Re-order point = 450 casting + 900 castings = 1,350 castings
Page - 41
Friday, March 07, 2014
Md.Monowar Hossain FCMA, CPA, ACS, ACA
Audit Consultant (General Manager), Rupali Bank Ltd.
eMail: md.monowar@gmail.com
Date
Particulars /
Reference
Feb. 01
Feb. 01
Feb. 20
Opening Balance
Purchases
Purchases
Unit
100
100
Feb. 22
Feb. 23
Qnt.
60
Balance
Amou
nt
Tk.
-
1.00
60
1.00
40
Qnt.
Rate per
unit
Amount
Unit
100
100
100
40
100
80
Tk.
1.00
1.00
2.00
1.00
2.00
2.00
Tk.
100
100
200
40
200
160
40
60
80
2.00
20
Date
Particulars /
Reference
Feb. 01
Feb. 01
Feb. 20
Opening Balance
Purchases
Purchases
Unit
100
100
Feb. 22
Feb. 23
Qnt.
40
60
2.00
Balance
Amou
nt
Tk.
120
2.00
40
Qnt.
Rate per
unit
Amou
nt
Unit
100
100
100
100
40
80
Tk.
1.00
1.00
2.00
1.00
2.00
1.00
Tk.
100
100
200
100
80
80
80
60
100
1.00
20
20
Page - 42
Friday, March 07, 2014
Md.Monowar Hossain FCMA, CPA, ACS, ACA
Audit Consultant (General Manager), Rupali Bank Ltd.
eMail: md.monowar@gmail.com
Date
Particulars /
Reference
Feb. 01
Feb. 01
Feb. 20
Feb. 22
Feb. 23
Opening Balance
Purchases
Purchases
Issues for Job-W
Issues for Job-X
Qnt.
Unit
100
100
-
Balance
Qnt.
Rate per
unit
Amou
nt
Unit
100
200
140
80
Tk.
1.00
1.50
1.50
1.50
Tk.
100
300
210
120
33,900
17,500
51,400
10,000
61,400
10,500
71,900
14,500
57,400
17,600
75,000
19,000
56,000
Page - 43
Friday, March 07, 2014
Md.Monowar Hossain FCMA, CPA, ACS, ACA
Audit Consultant (General Manager), Rupali Bank Ltd.
eMail: md.monowar@gmail.com
2,500
3,500
62,000
13,000
75,000
(b) No. of days for which Average inventory is held =Days in a year/ITR = 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) = 250000 = 500 units
(b) Reorder level = Maximum Consumption x Maximum Delivery Period = 50 x 32 = 1600 units
Solutions of problem no. 10 : Solution of problem-8: (Application of Cost Concept)
Variable Cost per unit
Total variable cost for 1200 units = 1200 units x Tk. 12 = Tk. 14,400
Total fixed cost = Total cost Total Variable Cost = 19,400 14,400 = Tk. 5,000
Solutions of problem no.11 : (Inventory E.O.Q)
(i) Economic Order Quantity is the quantity that should be ordered each time:
2
EOQ =
Where,
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 4.5 8,000
=
16
5
100
Page - 44
Friday, March 07, 2014
= 90,000
= 300 units.
ii) Number of Orders to be placed in a year =
=
27 orders.
(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
=
(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 - 45
Friday, March 07, 2014
Md.Monowar Hossain FCMA, CPA, ACS, ACA
Audit Consultant (General Manager), Rupali Bank Ltd.
eMail: md.monowar@gmail.com