186 Part IV. Costing and Accounting for Product Cost Elements 8-22. (i) Economic Order Quantity. Fog = [2XARxOC _ [2 x180000Sq.Ft_xRs 125 cc * Rs.50 x 10% EOQ = pad = 9000000 = 3,000Sq. Ft. (ii) Number of orders. Annual requirement + EOQ = 180,000 Sq. Ft. = 3,000 Sq. Ft. = 60 orders (iii) Proof: a) 3) (4) (5) 6) Annual | Order | No.of | Ordering | Average | Carrying Requirement Orders Cost |Inventory}| Cost Sq. Ft. Rs. Sq. Ft. Rs. 180,000 75 9,375, 1,200 6,000 180,000 60 7,500 1,500 7,500 180,000 50 6,250 1,800 9,000 Notes: (2) Order size | =Assumed (3) No. of orders =Annual requirement + Order size (4) Ordering cost =No. of orders x Rs. 125 (5) Average inventory =Order size + 2 (6) Carrying cost =Average inventory x Rs. 50 x 10%Chapter 8. Materials — Costing & Accounting. 187 8-23. (1) Economic Order Quantity. _ fERARXOC _ [2 x20,000units x Rs.50 a7 cc ~ Rs. 100 x 8%) EOQ = jecop.ane. = 250000 = 500units (2) Number of orders. Annual requirement + EOQ = 20,000 units + 500 units = 40 orders (3) About how often will an order need to be placed? Number of days in a year + Number of orders 365 days = 40 orders = 9.125 i.e. after every 9 days an order will to be placed. 4) Proof. a Annual Requirement Units 20,000 20,000 20,000 Notes: Q) (3) No. of orders. =Annual requirement + Order size (4) Ordering cost. =Number of orders x Rs. 50 (5) Average inventory =Order size + 2 (6) Carrying cost =Average inventory x Rs. 100 x 8% (7) Total cost =Ordering cost + Carrying cost188 Part IV. Costing and Accounting for Product Cost Elements 8-24, (1) Economic Order Quantity. 2_x 64,800 liters x Rs. 400 _ fexARKOC _ nog = =A. = |RSS + (Rs. 40 x 10%) — EOQ = a = 5,760,000 = 2,400 liters (2) Number of orders. Annual requirement + EOQ = 64,800 liters = = 27 orders 400 liters (3) About how often will an order need to be placed? Number of days in a year = Number of orders 365 days + 27 orders = 13.52 i.e. after about every 14 days an order will to be placed (4) Proof. (4) 6 65) a Average | Carrying | Total Inventory | Cost Cost Notes: (2) Order size (3) No. of orders =Annual requirement + Order size (4) | Ordering cost =Number of orders x Rs. 400 (5) Average inventory =Order size + 2 (6) Carrying cost. =Average inventory x Rs. 9 (7) Total cost ~+=Ordering cost + Carrying costChapter 8. Materials — Costing & Accounting. 189 8-25. (1) Economic Order Quantity. oq = [2XARXOC _ [2 x57,600 grams x Rs.300 = cc = YRs.2.25 + (Rs.50 x 7.5%) Fog = [34 aa 000 _ 5,760,000 = 2,400 grams (2) Computation of Savings: Ww 2) QB) (4) 6) © ™ Annual | Order | No.of | Ordering} Average | Carrying | Total Requirement} Size | Orders | Cost | Inventory] Cost Grams Rs. 7.200 | 43,200 1,200 7,200 Notes: (2) Order size = In accordance with present policy & In accordance with EOQ. (3) No. of orders =Annual requirement + Order size (4) Ordering cost. =No. of orders x Rs. 300 (5) Average inventory=Order size + 2 (6) Carrying cost =Average inventory x Rs. 6 (7) Total cost. = Ordering cost + Carrying cost 30,000 8-26. 2xAR x OC 2x 19,200 units x Rs. 75 EOQ = \- cc = \ Rs. d0 x 20% 2, E09 [2.880.000 = 360,000 = 600units190 Part iV. Costing and Accounting for Product Cost Elements. Calculation of Saving Per Year: qd) (2) (3) (4) 6) © (ed) Annual | Order | No.of | Ordering | Average | Carrying | Total Requirement} Size Orders Cost Inventory Cost Cost Units Units Rs. Units Rs. Rs. 19,200 | 9,600 2 150 | 4,800 | 38,400 | 38,550 19,200 600 | 32 2,400 300 | 2,400 | 4,800 ‘Saving Per Year 33,750 Notes: (2) Order size = Present & Economic order quantity (3) No. of orders = Annual requirement + Order size (4) Ordering cost = No. of orders x Rs. 75 (5) Average inventory = Order size + 2 (6) Carrying cost = Rs. 8 x Average inventory 8-27 5 f2xARxOC _ 0 BOQ = Jc SO (Rs.50 x 10%) zog = il a = 2,250,000 = 1,500units Calculation of Saving Per Year: qa (2) QB) (4) 6) © a Annual | Order | No.of | Ordering | Average | Carrying | Total Requirement] Size | Orders | Cost _|Inventory| Cost | Cost Ke. Kg. Rs. Kg. Rs. Rs. 22,500 | 7,500 3 750 | 3,750 | 18,750 | 19,500 22,500 | 1,500 | 15 3,750 750_| 3,750 | 7,500 [Saving Per Year 12,000 Notes: (1) Annual requirement = 7,500 kg. x 3 orders = 22,500 units (2) Order size = Present & Economic order quantity (3) No. of orders =Annual requirement + Order size (4) Ordering cos (5) Average inventory=Order size + 2 (6) Carrying cost = Rs. 5 x Average inventory No. of orders x Rs. 250Chapter 8. Materials — Costing & Accounting. 191 8-28 (@ Order point =Maximum usage during lead time Order point =250 units x 8 days =2,000 uits (i) Maximum inventory level = Order point - (Minimum usage during lead time) + EOQ Maximum inventory level = 2,000 units - (150 units x 8 days) + 2,500 unit Maximum inventory level = 3,300 units Gii) Minimum inventory level = Order point — Average usage during lead time Minimum inventory level = 2,000 units — (200 units x 8 days) Minimum inventory level = 400 units 8-29 (@) Reorder level =Maximum consumption during lead time =1,800 kg. x 6 weeks =10,800 kg. (b) Minimum stock level =Reorder level — Average consumption during lead time 446 = 10,800 kg. ~ (1,600 kg. x “2 weeks) 0,800 kg. — (1,600 kg.x 5 weeks) =10,800 kg. - 8,000 kg. 800 kg. (c) Maximum stock level =Reorder level — (Minimum consumption during lead time) + EOQ 0,800 kg. - (1,400 kg. x 4 weeks) + 6,000 kg. =11,200 kg.192 Part IV. Costing and Accounting for Product Cost Elements. 8-30 (i) Ordering point =Maximum requirement during lead time 0 units x 50 days 500 units Gi) Minimum limit =Ordering point - (Average requirement during lead time) =1,500 units — (20 units x2 7 aa days) 100 units Giii) Maximum limit=Order point — (Minimum requirement during lead time) +EOQ =1,500 units — (10 units x 40 days) + 1,000 units 100 units (iv) Danger level =Average requirement during lead time to get emergency supply =20 units x 5 days =100 units 8-31 (a) Order point. =Maximum consumption during lead time 26,000 units x 1 month ,000 units (6) Minimum inventory =Order point — Average consumption during lead time 145,200 unit Minimum inventory =26,000 units — (tiS.200pnie x1 month) 6 months 6,000 units - 24,200 units 800 units (©) Maximum inventory =Order point - Minimum consumption during lead time + EOQ =26,000 units — (22,200 units x 1 month) + 32,000 units =35,800 unitsChapter 8. Materials — Costing & Accounting. 193 8-32 Ordering level =Maximum requirement during lead time = 10D iceeS > weeks =50 pieces Minimum limit =Ordering level — Average requirement during lead time 0 pieces ~ (3 pieces x 6 days x 2 weeks) 14 pieces Note: 6 working days are assumed in a week. Maximum limit =Ordering level - Minimum requirement during lead time + EOQ a ‘50 pieces oso ices (Sit =50 pieces — 25 pieces + 60 pieces =85 pieces x2 weeks) +5 dozens x 12 pieces Danger level =Average requirement during lead time for emergency supplies Danger level =3 pieces x 2days =6 pieces 8-33 Order level =Maximum requirement during lead time 2,500 reams ="30 — x 15 days =1,250 reams Minimum level =Order level — Average requirement during lead time ,250 reams — (50 reams x 15 days) =500 reams Maximum level =Order level — Minimum requirement during lead time + EOQ 1,000 =1,250 reams — (Lopoans x15 day) + 1,200 reams =1,950 reams Danger level =Average requirement during lead time to get urgent suppliers =50 reams x 3 days =150 reams194 Part IV. Costing and Accounting for Product Cost Elements. 8-34 @ Order Point: Order point. =Maximum usage during lead time Order point. =750 liters x 12 days =9,000 liters (ii) Economic Order Quantity: Maximum level =Order point — Minimum usage during lead time + E0Q 12,000 liters ,000 liters — (250 liters x 8 days) + EOQ 12,000 liters ,000 liters — 2,000 Liters + EOQ 12,000 liters =7,000 liters + EOQ EOQ ,000 liters 8-35 (i Re-order Level: Re-order level =Maximum consumption during lead time Re-order level =1,500 units x 4 months =6,000 units (ii) Re-order Quantity: Maximum level =Re-order lever — Minimum consumption during lead e + EOQ 8,400 units =6,000 units — (800 units x 2 months) + EOQ 8,400 units =6,000 units — 1,600 units + EOQ 8,400 units 400 units + EOQ Re-order quantity =4,000 units 8-36 (1) Ordering level =Average requirement during lead time + Safety stock =70 pieces x 10 days + 140 pieces =840 pieces (2) Minimum level = Ordering level - Average requirement during lead time 840 pieces - 70 pieces x 10 days 140 pieces (3) Absolute maximum level = Ordering level - (Minimum requirement during lead time) + EOQ 840 pieces — (40 pieces x 10 days) + 1,000 pieces 1,440 piecesChapter 8. Materials — Costing & Accounting. 195, (4) Normal maximum level = Ordering level - (Average requirement during lead time) + EOQ 840 pieces — (70 pieces x 10 days) + 1,000 pieces 1,140 pieces = (EOQ +2) + Safety stock = (1,000 pieces + 2) + 140 pieces = 640 pieces (5) Average level (6) Danger level = Average requirement during lead time to get urgent supply 70 pieces x | day = 70 pieces 8-37 (1) Ordering point = Average usage during lead time + Safety stock = (3,400 units x “* weeks) + 8,000 units = 23,300 units (2) Minimum level = Ordering level — Average usage during lead time = 23,300 units - (3,400 units x “2 weeks) = 8,000 units (3) Absolute maximum level = Ordering level - (Minimum usage during lead time) + EOQ = 23,300 units — (2,800 units x 4 weeks) + 12,000 units = 24,100 units (4) Normal maximum level = Ordering level — (Average usage during lea time) + EOQ ; te ye 45 = 23,300 units ~ (3,400 units x 425 weeks) + 12,000 uni = 20,000 units (5) Average level = (EOQ +2) + Safety stock = (12,000 units + 2) + 8,000 units 14,000 units (6) Danger level = Average requirement during lead time to get urgent supply 3,400 units x 2 weeks 6,800 units