MANAGEMENT ACCOUNTING 2
UNIT 1a- Accounting for Materials
TUTORIAL QUESTIONS
Students are responsible to ATTEMPT all tutorial questions before class. Your lecturer is here
to guide you.
FREE STOCK BALANCE
N
O
T
E
S
To obtain a full picture of the stock position of an item it is necessary to know not only the
physical stock balance, but also the Free Stock Balance. This is defined as follows:
Free Stock Balance = Physical stock + outstanding replenishment orders – unfulfilled
requirements or allocations
The free stock balance is a notional, not physical stock and is a key figure in Inventory control.
1. You are given the following information:
Physical Stock balance
Quantities on outstanding purchase orders
Quantities on outstanding requisitions
1800 units
2700 units
900 units
Required: Calculate the Free Stock Balance
Free Stock Balance = Physical stock + outstanding replenishment orders – unfulfilled
requirements or allocations.
Free Stock Balance= 1800 units + 2700 units -900 units
Free Stock Balance= 3600units
ho
2. You are given the following information.
Physical Stock balance
Quantities on outstanding purchase orders
Quantities on outstanding requisitions
¼ of the Free Stock Balance
2700 units
900 units
Required: Calculate the
a. Physical stock balance
900
b. Free Stock Balance = Physical stock + outstanding replenishment orders –
unfulfilled requirements or allocations
900+2700-900 units= 2700 units
1
3. You are given the following information.
Physical Stock balance
Quantities on outstanding purchase orders
Quantities on outstanding requisitions
1/5 of the Free Stock Balance
40,000 units
5,000 units
Required: Calculate the physical stock balance and the free stock balance.
The physical stock balance is 720 units.
Free Stock Balance = Physical stock + outstanding replenishment orders – unfulfilled
requirements or allocations
720+40,000-5000 units= 35,720 units
INVENTORY CONTROL LEVELS
4. The following data relates to an item of raw material.
Value of Raw Material
Consumption per day
Minimum lead time
Maximum lead time
Order cost for material
Carrying costs
$20
200 units
20 days
30 days
$450 per order
10% p.a.
Assume that each year has 360 days.
Required: Calculate EOQ, Re-order level, Minimum level, Maximum level
Calculate EOQ:
Re-order level:( Maximum usage X Maximum lead time)
Minimum level: ROL- (Average usage X Average Lead)
Maximum level: ROL+ EOQ- (Minimum Usage X Minimum Lead)
5. The BOF Company has in the past ordered raw material “X” in quantities of 3,250 units, which
is 26 weeks’ supply. Management has decided to change over to an ordering system based on
economic order quantities. Assume the following information pertaining to the company’s
purchasing and production activity:
Inventory usage rate: 120 – 130 units per week
Lead time:
2 – 4 weeks
Unit price:
$1.50
2
Order cost:
Carrying cost:
$7.50 per order
$0.30 per unit per year
Required: Calculate the
a. Economic Order Quantity (EOQ) using the formula.
b. re-order level: Maximum usage X Maximum lead time
c. maximum level: ROL+ EOQ- (Minimum Usage X Minimum Lead)
d. minimum level: ROL- (Average usage X Average Lead)
e. total annual order cost and carrying cost at the EOQ?
f. amount the company save by adopting the EOQ model?
6. AB Associates is reviewing its stock policy and has the following alternatives available for the
evaluation of stock number 12789:
Purchase stock twice monthly – 100 units
Purchase stock monthly – 200 units
Purchase stock quarterly – 600 units
Purchase stock biannually – 1,200 units
Purchase stock annually – 2,400 units
It is ascertained that the purchase price per unit is $0.80 for deliveries up to 500 units. A 5%
discount is offered by the supplier on the whole order where deliveries are 501 and up to
1,000 units, and 10% reduction on the total order for deliveries in excess of 1,000.
Each purchase order incurs administration costs of $5.00 Storage, interest on capital and
other are $0.25 per unit of average stock quantity held.
Required: Advise management on the optimum order size.
7. Reed Juices Limited purchases 25,000 litres of a material each year from a single supplier. At
the moment, the company obtains the material in batch sizes of 800 litres. The material costs
$16 per litre, the cost of ordering a new batch from the supplier is $32 and the cost of holding
one litre in stock, due to certain technical difficulties, is $4 per annum plus an interest cost
equal to 15% of the purchase price of the material.
3
The supplier has agreed to offer a discount on orders above a certain size. He has
offered the following price structure:
Order size (litres)
0 - 499
500 - 999
1,000 plus
Unit cost ($)
16.00
15.20
14.80
Required:
a. Prior to considering discounts: calculate the economic order quantity and the annual savings
that will be obtained if the EOQ replaced the current lot size.
b. The supplier has offered quantity discounts based on the price structure indicated above,
after considering discounts, how does this affect the optimal order quantity, and what would
be the annual savings compared to the inventory costs with the EOQ you calculated in (a)?
c. At a recent meeting, Michael Wong, one of Reed’s Ltd senior managers stated that the
company should not use the EOQ model because it is based on unrealistic assumptions and
no one in the company really understands how the model works. Draft a memo addressed to
the company’s managing director to respond to Mr. Wong’s concerns.
VALUATION OF MATERIALS ISSUES AND STOCK- FIFO/AVCO
8. On January 1, Mr. Muir started a small business buying and selling thread. She invested her
redundancy money of $400,000 in the business, and, during the next six months, the following
transactions occurred.
Date of
Receipt
January 13
February 8
March 11
April 12
June 15
Thread
purchases
quantity
(boxes)
200
400
600
400
500
Total cost
($)
Date of
dispatch
Thread
sales
boxes
Total
value
7,200
15,000
24,000
14,000
14,000
Feb 10
500
25,000
April 20
600
27,000
June 25
400
15,200
4
The thread is stored in an office Mr. Muir has rented, and the closing stock of thread, which was
counted on June 30, was 500 boxes. Other expenses incurred, and paid for in cash, during the
period amounted to $3,100.
Required:
(a) Calculate the value of the material issues during the six-month period, and the value of the
closing stock at the end of June, using the following methods of pricing.
(i) first-in, first-out,
(ii) weighted average (calculations to two decimal places only)
(b) Calculate and discuss the effect each of the three methods of material pricing will have on the
reported profit of the business and examine the performance of the business during the first
six-month period.
5