Material Costing

Topics to be covered:
Part 1 Stock levels
Part 2 Economic order quantity
Part 3 Valuation of inventory
Part 4 Perpetual Inventory
 Part 1 Stock Levels
1. Maximum 2. Minimum 4. Average Stock
3. Re-order level 5. Danger Level
Stock Level Stock Level Level
• Largest • Lowest • Level of stock • Average of • If go below
quantity to be quantity to be at which fresh minimum and minimum
held in stores held in stores order should maximum order level
all time be placed for inventory level • Require
replenishment special
of stock permission for
urgent
requirement
How to compute levels
1. Maximum Stock level:
Reorder level + Reorder quantity –(Minimum rate of consumption * Minimum Re-order
period)

2. Minimum Stock level:

3. Re-order level:
Maximum Rate of consumption * Maximum Reorder Period
OR
Minimum Level + (Normal rate of consumption * Normal Reorder Period)
How to compute levels
4. Average Stock level:
Minimum Level + ½ Reorder Quantity
OR
Maximum Level+ Minimum Level
2

5. Danger Level:
Normal Rate of Consumption * Maximum Reorder Period for emergency
purchases
Part 2 : Economic Order Quantity
• The Objective of EOQ is to determine the order size which is most
economical to order
• 3 main factors:
a. Ordering Costs b. Carrying Costs c.Annual Consumption
- Cost of placing an order - Cost of storage space
- Cost of transportation - Cost of handling materials
- Cost of receiving goods - Cost of Insurance
- Cost of inspecting goods - Cost of store staff
- Cost of deterioration or
obsolescence
EOQ
•Formulae
  to calculate EOQ

C
A= Annual consumption
O= Ordering cost
C= Carrying cost
Problems
Q 1 From the following information, calculate (a) Re-order Level (b)
Minimum level (c ) Maximum level (d) Average stock level ( e) Danger
level.
Rate of consumption: Minimum 250 kg per week, Maximum 750 kg per
week, Normal 400 kg per week, Reorder period: Minimum 3 weeks,
Maximum 7 weeks, Normal 4 weeks. For emergency purchases 2
weeks, Reorder quantity 2000 kg
Q 2 In a company, weekly minimum and maximum consumption of
Material A are 25 and 75 units. The reorder quantity are fixed at 300
units. The material is received in 4 to 6 weeks from issue of supply
order. The emergency reorder period is 2 weeks. Calculate Minimum
level and maximum level of Material A, Average level and Danger level.
Q 3 The following data relates to a firm for 12 months:
Minimum usage of a component 50 units per week
Maximum usage 120 units per week
Normal usage 80 units per week
Delivery period is between 4 to 6 weeks, Orders are placed for 500
units at a time. Calculate maximum level and minimum level for the
component
Q 4 The following information is available:
Re-Order quantity 1,500 units
Re- Order period 4-6 weeks
Maximum consumption 400 units per week
Normal Consumption 300 units per week
Minimum Consumption 250 units per week
Emergency Reorder period 2 weeks
Calculate: Re-order level, Minimum level, Maximum level, Average stock
level, Danger level
Q 5 From the following particulars, calculate EOQ:
Annual Demand 12,000 units
Ordering cost ₹ 90 per order
Inventory carrying cost ₹15
Q 6 From the following particulars, calculate EOQ:
Semi Annual Consumption 6,000 units
Purchase price of input unit ₹ 25
Ordering cost ₹ 45 per order
Quarterly carrying cost 3%
Q 7 From the following particulars, calculate EOQ:
Average inventory level 200
Orders per year 40
Average daily demand48
Working days per year 250
Annual ordering costs ₹ 4,000
Annual carrying costs ₹ 6,000
Q 8 The following information relating to a type of raw material is
available:
Annual Demand 2,000 units
Unit Price ₹ 20
Ordering cost per order ₹ 20
Storage cost 2% p.a
Interest cost 8% p.a
Calculate EOQ and total annual inventory cost of raw material
• Q 9 X ltd manufactures a special product ‘ZED’ and provides the following information:
• Demand of ZED varies from 500 units to 1500 units per month
• Semi Annual Carrying cost 6%
• Ordering cost per order ₹ 90
• Raw material Required per unit of finished product 2 kg
• Purchase price of input unit ₹ 25 per kg
• Required to calculate (a) Economic order quantity and Total Cost at that quantity, (b) Advise the company if
it proposes to place orders on monthly basis. (c) Would your advise in part (b) differ if the company has
been offered a discount of 4% on monthly orders?
Q 10 KL limited produces product ‘M’ which has a quarterly demand of 8,000 units. The Product requires 3kgs
quantity of Material ‘X’ for every finished unit of product.
Cost of material ‘X’ 20 per kg
Cost of placing an order 1,000 per order
Carrying cost 15% p.a. of average inventory
Calculate EOQ for material ‘X’
Should the company accept an offer of 2% discount by the supplier, if he wants to supply the annual requirement
of Material ‘X’ in 4 equal quarterly instalments
Q 11 The following details are available
1. Inventory requirement per year 6,000 units
2. Cost per unit (other than carrying and ordering costs) 5
3. Carrying cost per item for one year 1
4. Cost of placing each order 60
5. Alternate order size (units) 2,000 ; 1,200; 1,000; 600 and 200
Calculate EOQ
1-1-2019 Purchases 100 units @ ₹ 30 per unit

15-1-2019 Issued for consumption 50 units

20-1-2019 Purchases 200 units@ ₹ 40 per unit

25-1-2019 Issued for consumption 100 units

30-1-2019 Issued for consumption 100 units

1-2-2019 Purchases 150 units @ ₹ 50 per unit

15-2-2019 Loss by Fire 100 units

18-2-2019 Purchases 100 units @ ₹ 40 per unit

22-2-2019 Purchases 200 units @ ₹ 45 per unit

25-2-2019 Issues 250 units

28-2-2019 Purchases 300 units @ ₹ 50per unit

2-3-2019 Purchases 100 units @ ₹ 60per unit

8-3-2019 Purchases 200 units @ ₹ 55 per unit

15-3-2019 Issues 300 units

28-3-2019 Issues 50 units

Find out the value of stock as on 31.03.2019 if the company follows: