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INTRODUCTION TO COSTING
UNIT 1 - TUTORIAL QUESTIONS
ACCOUNTING FOR MATERIALS
Students are responsible to ATTEMPT all tutorial questions before class. Your lecturer is
here to guide you.
1
Which of the following are possible consequences of a failure to control the ordering and receipt
of materials?
a) Incorrect materials being delivered, disrupting operations
b) Incorrect prices being paid
c) Deliveries other than at the specified time (causing disruption)
d) Insufficient control over quality
e) Invoiced amounts differing from quantities of goods received or prices agreed.
2
In the context of inventory management, differentiate between the following:
a) Bin card and stores ledger account
b) Periodic and continuous stocktaking
c) Which is better, periodic and continuous stocktaking?
3
What is the Perpetual Inventory System?
4
An audit of the stocks in your organization shows many discrepancies between the actual
quantities counted and the quantities on record.
State the possible causes of these differences from the receipt of items to the eventual despatch of
finished products.
INVENTORY CONTROL LEVELS
5
Define lead-time, buffer stock and re-order level.
6
What assumptions are made when using the Economic Order Quantity (EOQ) decision model?
7
You are given the following information
EOQ
Minimum Usage
Minimum Lead Time
Maximum Level
4000 units
300 units
5 days
6 times the reorder level
Calculate the maximum level.
8
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
$64
250 units
20 days
30 days
$720 per order
10% p.a. of unit cost
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2
Assume that each year has 360 days
Required: Calculate the
(a) EOQ
(a) Re-order level
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(c) Minimum level
(d) Maximum level
The BOF Company has in the past ordered raw material “X” in quantities of 3,125 units, which is
13 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:
Lead time:
Unit price:
Order cost:
Carrying cost:
120 – 130 units per week
2 – 4 weeks
$1.50
$5 per order
$0.50 per unit per year
Required:
(a) Calculate the Economic Order Quantity (EOQ) using the formula
(b) Calculate the re-order level
(c) Calculate the maximum level
(d) Calculate the minimum level
(e) What is the total annual order cost and carrying cost at the EOQ?
(f) How much would the company save by adopting the EOQ model?
10 AB Associates is reviewing its stock policy and has the following alternatives available for the
evaluation of stock number 12789:
(i) Purchase stock twice monthly – 100 units
(ii) Purchase stock monthly – 200 units
(iii) Purchase stock quarterly – 600 units
(iv) Purchase stock biannually – 1,200 units
(v) 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
costs are $0.25 per unit of average stock quantity held.
(a) You are required to advise management on the optimum order size.
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11 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 $4 per annum plus an interest cost equal to 15% of the
purchase price of the material.
The supplier has agreed to offer a discount on orders above a certain size. He has
offered the following price structure:
Order size (litres)
0 - 499
500 - 999
1,000 plus
Unit cost ($)
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.
12 Fresco Inc. manufactures sour pops annually which requires 0.4 kilograms of raw material. The
company produces and sells 1,600,000 sour pops annually. The cost to place a single order is $60
per hour which takes four (4) hours on average. The annual carrying cost of inventory is 4% per
annum and currently, the company orders twenty (20) times per year.
A major supplier has offered some incentives for bulk purchases and as the junior cost accountant
you were asked to provide your professional opinion on the optimal order size. A 3% discount
would be given if the entity doubles its current lot size. A further 2% would be given if the entity
increased its order by two and a half times the current lot size. The material is currently bought
from its supplier for $120 per kilogram.
Required:
(a) Calculate the Economic Order Quantity (EOQ).
(b) Calculate the total cost based on the EOQ.
(c) Calculate the total cost for each alternate order quantities, including the current policy.
(d) What is the optimal order quantity and why?
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VALUATION OF MATERIALS ISSUES AND STOCK
FIFO/LIFO/AVCO
13 The following transactions relate to a raw material for a period:
Day
1
3
4
6
7
Transaction
Balance b/f
Issue
Receipt
Receipt
Issue
Units
100
40
50
50
70
Total value
$500
$275
$300
The weighted average method is used to price material issues.
What is the value of the issue on day 7?
(a)
(b)
(c)
(d)
$376.25
$382.81
$402.50
$410.00
14 ABC limited had an opening stock value of $880 (275 units valued at $3.20 each) on April 1. The
following receipts and issues were recorded during April:
8 April Receipts 600 units
15 April Receipts 400 units
30 April Issues 925 units
$3.00 per unit
$3.40 per unit
Using the FIFO method, what was the total value of the issues on April 30?
(a) $2,580
(b) $2,850
(c) $2,931
(d) $2,935
15 A company had the following inventory transactions during the month of December 2019.
Receipts
Dec. 1
Dec. 5
Dec. 10
1,000 units @ $10 each
1,500 units @ $15 each
1,200 units @ $20 each
Issues
Dec. 8
2,300 units @ $25 each
What was the value of the stock at the end of the month, if the company used the LIFO (last-infirst-out) method of stock valuation?
A. $27,000
B. $26,600
C. $26,000
D. $16,000
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16 On January 1, Ms. Plummer commenced a small business to trade clothing. She invested some
funds in the business and during a 5-month period, the following transactions took place.
Date
January 01
January 12
March 05
Receipts
Purchases
(units)
150
(Opening stock)
200
455
Total cost
($)
40,500
58,000
145,600
Date
Dispatch
Sales (units)
February 03
240
Total value
($)
93,600
April 21
May 31
390
120
175,500
58,800
The boxes containing the clothes are stored in an office that Ms. Plummer rented and the closing
stock based on the stocktaking amounted to 50 units. Other expenses incurred, and paid for in
cash, during the period amounted to $13,200.
Required:
(a) Calculate the value of the material issues for the period and the value of the closing stock
at the end of May, using the following methods of pricing
(i) first-in, first-out,
(ii) last-in-first-out
(iii) weighted average (calculations to two decimal places only)
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