CA – IPC TEST
MATERIAL COSTING
MM: 46 Marks
Duration:1hr 30min
Solution 1:
`
(a) If he stocks 1 kg.
When demand is 0 kg. he incurs loss of
2
When demand is 1 kg. he makes profit of
3
When demand is 2 kg. he makes profit of
3
When demand is 3 kg. he makes profit of
3
When demand is 4 kg. he makes profit of
3
(b) If he stocks 2 kgs.
When demand is 0 kg. he incurs loss of
4 (2 x -2)
When demand is 1 kg. he makes profit of
1 (3 -2)
When demand is 2 kg. he makes profit of
6 (3 + 3)
When demand is 3 kg. he makes profit of
6 (3 + 3)
When demand is 4 kg. he makes profit of
6 (3 + 3)
(c) If he stocks 3 kgs.
When demand is 0 kg. he incurs loss of
6 (3 x -2)
When demand is 1 kg. he incurs loss of
1 (loss 4 -3 profit)
When demand is 2 kg. he makes profit of
4 (3 + 3 - 2)
When demand is 3 kg. he makes profit of
9 (3 + 3 + 3)
When demand is 4 kg. he makes profit of
9 (3 + 3 + 3)
(d) If he stocks 4 kgs.
When demand is 0 kg. he incurs loss of
8 (4 x -2)
When demand is 1 kg. he incurs loss of
3 (3 x -2 = -6 + 3 profit)
When demand is 2 kg. he makes profit of
2 (3 + 3 – 2 - 2)
When demand is 3 kg. he makes profit of
7 (3 + 3 + 3 - 2)
When demand is 4 kg. he makes profit of
12 (3 + 3 + 3 + 3)
Expected Profit on the above situations:
(a) If he stocks 1 kg.:
Probability x Profit/Loss
0.05
x
(-) 2
(-0.1)
0.20
x
3
0.60
0.40
x
3
1.20
0.25
x
3
0.75
0.10
x
3
0.30
Profit
2.75
(b) In the similar way of calculations
if he stocks 2 kg. Profit will be `4.50
(c) if he stocks 3 kg. Profit will be `4.25
(d) if he stocks 4 kgs. Profit will be `2.75
Advise: In order to maximise profit, he should stock 2 kgs.
Solution 2: Annual Demand, i.e., A = 1,000 units
Inventory carrying cost, i.e., C = 15% + 5% + 20% = 40% of `10 = `4
Ordering cost per order, i.e., O = 50 + 30 + 20 + 25 = `125
EOQ =
2xAxO
=
2 x 1,000 x 125 = 250 units
C
4
Total cost with EOQ = Purchase cost + Total storage cost + Total ordering cost
= [10 x 1,000] + [(250/2) x 4] + [(1,000/250) x 125] = 10,000 + 500 + 500 = `11,000
In case order size is 500 to avail 10% discount, then number of orders is 1,000/500 = 2; purchase price is 10 x 90%
= `9; and carrying cost is 40% of `9 = 3.60
Total cost = [9 x 1,000] + [(500/2) x 3.60] + [2 x 125] = 9,000 + 900 + 250 = `10,150
Thus order size of 500 units with 10% discount results in total cost saving of `11,000 - `10,150 = `850. Hence it is more
profitable policy to place order for 500 units at 10% price discount rather than adhering to EOQ of 250 units.
Solution 3: Minimum Daily Consumption = 2 x Average daily consumption – Maximum daily consumption = 2 x 12 – 16 = 8 units.
Average Lead time = Maximum Lead time + Minimum Lead time = 10 + 6 = 8 days
2
2
EOQ = 2 x A x O = 2 x 4,000 x 200 = 400 units
C
(60 x 0.10 ) + 4
Reorder Level = Maximum Daily Consumption x Maximum Lead time = 16 x 10 = 160 units
Safety Stock or Minimum Level = Reorder Level – (Average Daily Consumption x Average Lead time)
= 160 – (12 x 8) = 64 units
Maximum Level = Reorder Level + EOQ – (Minimum Daily Consumption x Minimum Lead time)
= 160 + 400 – (8 x 6) = 512 units
Solution 4: (i) Calculation of Purchase Cost per Kg. of Materials
Particulars
Wholesale Market (`) Farmers (`)
Mustard:
Purchase Price
15.00
12.50
Add: Central Sales Tax @ 2%
0.30
--Add: Loading Cost
0.20
0.10
(`10 ÷ 50 Kg)
(`5 ÷ 50 Kg)
Add: Unloading Cost
0.04
0.04
(`2 ÷ 50 Kg)
(`2÷ 50 Kg)
15.54
12.64
Soybean:
Purchase Price
11.00
9.00
Add: Loading Cost
0.20
0.06
(`10 ÷ 50 Kg)
(`3÷ 50 Kg)
Add: Unloading Cost
0.04
0.04
(`2 ÷ 50 Kg)
(`2÷ 50 Kg)
11.24
9.10
Olive:
Purchase Price
36.00
28.00
Add: Import duty @ 10%
--2.80
Add: Loading Cost
0.20
0.50
(`10 ÷ 50 Kg) (`25÷ 50 Kg)
Add: Unloading Cost
0.04
0.04
(`2 ÷ 50 Kg)
(`2÷ 50 Kg)
36.24
31.34
(ii) Economic Order Quantity (E.O.Q) = 2 × A × O
C
Annual Requirement (A):
Commodity
Quantity (Kg)
Mustard (45,000 Ltr. × 5 Kg × 12 months)
27,00,000
Soybean (15,000 Ltr. × 6 Kg × 12 months)
10,80,000
Olive
(3,000 Ltr. × 4.5 Kg × 12 months)
1,62,000
Cost per Order (O):
Particulars
Wholesale Market (`) Farmers (`)
Mustard:
- Transportation cost
6,000
15,000
- Sorting and piling cost
--1,200
6,000
16,200
Soybean:
- Transportation cost
9,000
12,000
- Sorting and piling cost
--800
9,000
12,800
Olive:
- Transportation cost
3,000
11,000
- Sorting and piling cost
1,800
--4,800
11,000
Carrying Cost per Kg. per annum (C)
Particulars
Wholesale Market (`)
Farmers (`)
Mustard:
- Interest on cash credit
1.9425
1.5800
(`15.54 × 12.5%) (`12.64 × 12.5%)
- Warehouse rent*
1.0000
1.0000
2.9425
2.5800
Soybean:
- Interest on cash credit
1.4050
1.1375
(`11.24 × 12.5%)
(`9.10 × 12.5%)
- Warehouse rent
1.0000
1.0000
2.4050
2.1375
Olive:
- Interest on cash credit
4.5300
3.9175
(`36.24 × 12.5%) (`31.34 × 12.5%)
- Warehouse rent
1.0000
1.0000
5.5300
4.9175
*Warehouse rent per Kg = `,100 = `1
100Kg
Calculation of E.O.Q for each material under the both options
Particulars Wholesale Market (Kg)
Farmers (Kg)
2×27,00,000Kg × `6,000 2×27,00,000Kg × `16,200
Mustard
`2.9425
`2.5800
= 1,04,933.53
= 1,84,138.47
2×10,80,000Kg × `9,000 2×10,80,000Kg × `12,800
Soybean
`2.4050
`2.1375
= 89,906.40
= 1,13,730.98
2×1,62,000Kg × `4,800
2×1,62,000Kg × `11,000
Olive
`5.5300
`4.9175
= 16,769.90
= 26,921.34
(iii) Selection of best purchase option for the purchase of Olives
Particulars
Wholesale Market
Annual Requirement (A) (Kg.)
1,62,000
Order Quantity (Q)
16,769.90
No. of orders A
9.66 or 10
Q
.
Average Inventory Q
2
Ordering Cost (`)
.
(Kg)
(I)
Carrying Cost (`)
(II)
(Average Inventory × Carrying cost per kg)
Purchase Cost (`)
(III)
Farmers
1,62,000
1,62,000
1
8,384.95
81,000
48,000
(10 Order × `4,800)
46,368.77
(8,384.95 Kg × `5.5300)
58,70,880
11,000
(1 Order × `11,000)
3,98,317.5
(81,000 Kg × `4.9175)
50,77,080
(1,62,000 Kg × `36.24) (1,62,000 Kg × `31.34)
Total Cost (I) + (II) + (III)
59,65,248.77
54,86,397.50
Purchasing olives direct from the farmers is the best purchase option for the Mukul Agro Ltd.
Solution 5: A = 1,40,000 units
O = `13,500
C = `32.5
(i) Re-order quantity = 2 x A x O = 2 x 1,40,000 x 13,500 = 10,785 units
C
32.5
(ii) Re-ordering Level
= Maximum usage x Maximum re-order period
= 2800 units x 8 weeks = 22,400 units
(iii) Maximum Level
= Re-order level + Re-order quantity – (Minimum usage x Minimum re-order period)
= 22,400 + 10,785 – (1500 units x 4 weeks)
= 33,185 - 6,000 = 27,185 units
(iv) Minimum Level
= Re-order level – (Average usage x Average re-order period)
= 22,400 – (2,150 units x 6 weeks)
= 22,400 – 12,900 = 9,500 units
(v) Danger Level condition
= Average consumption x Re-order period in emergency condition
= 2,150 units x 2 weeks = 4,300 units
Solution 6:
Computation of Material Cost Sheet
Particulars
Amount in (`)
Purchase price of Material
2,00,000
Add: Fee on Board
10,000
Add: Import Duties of purchasing the material
15,000
Add: Freight Inward during the procurement of material
20,000
Add: Insurance paid
12,000
Total
2,57,000
Less: Trade Discount
(3,000)
Less: Rebates
(4,000)
Less: CENVAT Credit refundable
(7,000)
Less: Subsidy received from the Government for importation of materials
(18,000)
Value of Receipt of Materials
2,25,000
(i) Cash discount is not allowed, as it is a financial item.
(ii) Subsidy received, rebates and CENVAT Credit refundable are to be deducted for the purpose of computing the material
cost.