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CMA-Unit 3-Costing of Materials 18-19
CMA-Unit 3-Costing of Materials 18-19
CMA-Unit 3-Costing of Materials 18-19
Control of Materials
Just-in Time
Inventory/Production
Materials
Approved signature…………
Item………. Description…………….
Received Issued Balance
Date Quantity Amount Date Quantity Amount Date Quantity Amount
(iii) Reorder-
(iv) Safety Stock
Point
ABC Analysis
2 10,000 100.40
3 32,000 11.00
4 28,000 10.28
5 60,000 3.40
6 30,000 3.00
7 20,000 1.30
Economic Order Quantity (EOQ)
EOQ = √ 2 AB/C
√
2 × 1,600 × 50
EOQ = = 400 units.
1
Inventory Cost for Different Order Quantities
1. Size of order (units) 1,600 800 400 200 100
2. Number of orders 1 2 4 8 16
Working Notes
i. Number of orders = Total inventory requirement / Order size
ii. Average inventory = Order size / 2
Problem2: Annual demand for Product Alpha is 40000
units, cost of ordering is Rs200 per order and carrying
cost is Rs100 per unit per annum. The following data
with respect to ordering product alpha were given. Find
out EOQ and fix stock levels
Determination of stock level
Reorder level:
Reorder level
= Maximum Consumption x Maximum reorder period
=90x10=900 units
Maximum Level:
Maximum Level
= Reorder level + reorder quantity – (Minimum Consumption x Minimum
reorder period)
=900+400-(30x5)=1150
Determination of stock level
Minimum level:
Minimum stock Level
= Re order level – (Normal consumption x Normal reorder period)
= 900-(50x7)=550 units
Average stock level:
Average Stock level
= Minimum stock level + ½ of reorder quantity
=550+1/2(400)=750
Safety Stock
The safety stock are the minimum additional inventory which serve
as a safety margin to meet an unanticipated
increase in usage.
The first step is to estimate the probability of being out of stock,
as well as the size of stock-out.
Stock-out costs are costs associated with the shortage
(stock-out) of inventory.
Calculate stock-out cost.
Then, the carrying cost should be calculated.
Finally, the carrying costs and the expected stock-out costs at each safety
level should be added.
The optimum safety stock would be that level of inventory at which the
total of these two costs is the lowest.
Figure 7 has been drawn to show clearly the interrelationship that exists among various concepts of
inventory discussed so far. It serves the useful purpose of presenting an integrated picture at one place.
In the Figure, inventory of 400 units is delivered on Day 0. The company has the policy of maintaining a safety
stock of 200 units. With the receipt of 400 units inventory on Day 0, the inventory level reaches 600 units (the
maximum level).
Weighted
Average Method
Table 1 Inventory Valuation (FIFO Method)
Date Receipts Issues Inventory
Quantity Cost Value Quantity Cost Value Quantity Cost Value
(1) (2) (3) (4) (5) (6) (7) (8) (9)
January
1 10,000 Rs 21 Rs 2,10,000
9 1,000 Rs 22.1 Rs 22,100 11,000 — 2,32,100
12 2,000 Rs 21 Rs 42,000 9,000 — 1,90,100
27 1,000 23.10 23,100 10,000 — 2,13,200
February
10 4,000 21 84,000 6,000 --- 1,29,200
16 2,000 24.10 48,200 8,000 — 1,77,400
March
3 2,000 24.10 48,200 10,000 — 2,25,600
17 4,000 21 84,000 6,000 — 1,41,600
29 4,000 22.90 91,600 10,000 — 2,33,200
April
4 2,000 21.40 42,800 12,000 — 2,76,000
18 4,000 @ 93,400 8,000 — 1,82,600
23 2,000 20.40 40,800 10,000 — 2,23,400
May
12 1,000 24.10 24,100 9,000 — 1,99,300
24 3,000 20.00 60,000 12,000 — 2,59,300
June
10 1,000 24.10 24,100 11,000 — 2,35,200
30 2,000 20.20 40,400 13,000 — 2,75,600