MATERIAL COSTING
Problem: 1
For a manufacture of a certain product two components A and B are used. The following
particulars about these components are available:
Particulars A B
Normal usage per week 60 nos. 60 nos.
Maximum usage per week 80 nos. 80 nos.
Minimum usage per week 30 nos. 30 nos.
Reorder Quantity 400 nos. 600 nos.
Reorder period 4 to 6 weeks 2 to 4 weeks
You are required to calculate for each component:
1. Reordering level.
2. Minimum level.
3. Maximum level.
4. Average stock level.
5. Danger level.
Problem: 2
A company uses three raw materials A, B, and C for a particular product for which the
following data apply:
Raw Usage P.U ROQ Price ROL Minimum
Material Of (kg) Per (kg) Delivery period in weeks (kgs) Level Kgs.
product
Min Avg. Max.
A 10 10,000 0.10 1 2 3 8,000 ?
B 4 5,000 0.30 3 4 5 4,750 ?
C 6 10,000 0.15 2 3 4 ? 2,000
Weekly production varies from 175 to 225 units, averaging 200 units of the said product.
What would be the following quantites?
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MATERIAL COSTING
(a) Minimum stock of A?
(b) Maximum stock of B?
(c) Re-order level of C?
(d) Average stock level of A?
Problem: 3
Maximum level = 40,000 kgs.
Minimum level = 10,000 kgs.
Find Re-order Quantity?
Problem: 4
Particular A B C D
Raw material 10 15 8 6
per unit of
finished goods
(kgs)
ROL (kgs) - 20,000 - -
Minimum level - - - 20,400
(kgs)
ROQ (kgs) - 30,000 40,000 45,000
Lead time
Minimum (Days) 2 3 5 6
Maximum 8 - 12 14
(Days)
Production Quantity – 400 units to 600 units. You are required to compute,
(A) Minimum Level of A
(B) Maximum Level of B
(C) Re-order Level of C
(D) Average Level of D
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MATERIAL COSTING
Problem: 5
Minimum Level = 10,000 kgs
Average lead time = 5 weeks
Raw Material usage = 1000 to 4000 kgs.
Find:
(i) ROL
(ii) Max Lead Time.
Problem: 6
Compute EOQ for various situations:
Particulars S-1 S-2 S-3
Annual Requirement 1,00,000 kgs 2,00,000units 40,000litres
of Raw material
Ordering cost per Rs. 80 Rs. 50 Rs. 4
unit
Carrying cost per Rs. 4 Rs. 20 Rs. 0.5
unit per annum
Problem: 7
Anuradha Company has a Mumbai Plant that manufactures OTG. One component is an XY
chip. Expected demand is 10,000 chips. Anuradha estimates the ordering cost per purchase
order to be Rs. 250. The monthly carrying cost for one unit of XY in stock is 0.4167.
Required:
1. Compute the EOQ for the XY chip.
2. Compute the number of deliveries of XY in March, 2009.
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MATERIAL COSTING
Problem: 8
About 50 items are required every day for a machine. A fixed cost of Rs. 50 per order is
incurred for placing an order. The inventory carrying cost per item amounts to Rs. 0.02 per
day. The lead period is 32 days.
Compute:
(i) Economic order quantity
(ii) Re-order Level.
Problem: 9
Shriram enterprise manufactures a special product “ZED”. The following particulars were
collected for the year 2023.
I) Monthly demand of ZED – 1000 units
II) Cost of placing an order ₹ 100.
III) Annual carrying cost per unit ₹ 15.
IV) Normal usage 50 units per week.
V) Minimum usage 25 units per week.
VI) Maximum usage 75 units per week.
VII) Re-order period 4 to 6 weeks.
Compute from the above
1) Re-order quantity
2) Re-order level
3) Minimum level
4) Maximum level
5) Average stock level.
Problem: 10
G. Ltd. produces a product which has a monthly demand of 4,000 units. The product
requires a component X which is purchased at ₹20. For every finished product, one unit of
component is required. The ordering cost is ₹120 per order and the holding cost is 10% p.a.
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MATERIAL COSTING
You are required to calculate:
1. Economic order quantity.
2. If the minimum lot size to be supplied is 4,000 units, what is the extra cost, the company
has to incur.
3. What is the minimum carrying cost, the company has to incur?
Problem: 11
Total Ordering cost is Rs. 300/-
Carrying cost per unit p.a is Rs.1/-
Find EOQ?
Problem: 12
The following information relating to a type of Raw material is available:
Annual demand - 2000units
Unit price - Rs. 20.00
Ordering cost per order - Rs.20
Storage cost - 2% P.a
Interest rate - 8% p.a
Lead time - Half month
Calculate economic order quantity and total annual inventory cost of the raw material.
Problem: 13
The annual carrying cost of material 'X' is ₹2 per unit and its total carrying cost is ₹12,000
per annum. What would be the Economic order quantity for material 'X', if there is no
safety stock of material X?
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MATERIAL COSTING
Problem: 14
A Company manufactures a special product which requires a component 'Alpha'. The
following particulars are collected for the year 2023:
(i) Annual demand of Alpha 8,000 units
(ii) Cost of placing an order ₹200 per order
(iii) Cost per unit of Alpha ₹400
(iv) Carrying cost % p.a. 20% on net purchase value.
The company has been offered a quantity discount of 4% on the purchase of 'Alpha' provided
the order size is 4,000 components at a time.
Required:
(i) Compute the economic order quantity
(ii) Advise whether the quantity discount offer can be accepted.
Problem: 15
A Company manufactures a product from a Raw Material, which is purchased at 80 per kg.
The Company incurs a Handling Cost of 370 plus Freight of 380 per order. The incremental
carrying cost of inventory of Raw Material is 0.25 per kg per month. In addition, the cost of
Working Capital Finance on the investment in Inventory of Raw Material is 12 per kg per
annum. The annual production of the product is 1,00,000 units and 2.5 units are obtained
from one kg of Raw Material.
Required:
(I) Calculate the Economic Order Quantity of Raw Materials.
(II) Advise how frequently Company should order for procurement be placed
Assume 360 days in a year.
(III) If the Company proposes to rationalize placement of orders on quarterly basis
what percentage of discount in the price of Raw Materials should be negotiated?
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MATERIAL COSTING
Problem: 16
EXE Limited has received an offer of quantity discounts on its order of materials as under:
Price Per Tonne Tonnes
Rs. 1,200 Less than 500
Rs. 1,180 500 and less than 1000
Rs. 1,160 1000 and less than 2000
Rs. 1,140 2000 and less than 3000
Rs. 1,120 3000 and above
The annual requirement for the material is 5,000 tonnes. The ordering cost per order is
₹1200 and the stock holding cost is estimated at 20% of material cost per annum. Price per
tonne is Rs. 1,500.
You are required to Compute
1. The most economical purchase level.
2. What will be your solution to the above illustration if there are no discounts offered.
Problem: 17
X Ltd. is reviewing its stock policy, and has the following alternatives available for the
evaluation of stock:
a. Purchase stock twice in a month, 400 units.
b. Purchase monthly, 800 units
c. Purchase every three months, 2,400 units
d. Purchase six monthly, 4,800 units
e. Purchase annually, 9,600 units
It is ascertained that the purchase price per unit is ₹40 for deliveries upto 2,000 units. A
5% discount is offered by the supplier on the whole order where deliveries are 2,001 to
4,000 units and 10% reduction on the total order for deliveries in excess of 4,000 units.
Each purchase order incurs administration costs of ₹250. Interest on capital and other
storage costs are ₹12.50 per unit of average stock quantity held.
Calculate the optimum order size.
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MATERIAL COSTING
Problem: 18
A manufacturing company purchases 24,000 pieces of a component from a sub- contractor
at ₹500 per piece and uses them in its assembly department, at a steady rate. The cost of
placing an order and following it up is ₹2,500. The estimated stock holding cost is
approximately 1% of the value of average stock held. The company is at present placing
orders which at present vary between an order placed every two months i.e. Six orders per
annum to one order per annum. Which policy would you recommend?
Problem: 19
The annual carrying cost of material 'X' is ₹3 per unit and its total carrying cost is ₹30,000
per annum. Ordering cost per order ₹1000. Find:
(1) EOQ
(2) Annual requirement of Raw material
(3) No. of orders required and
(4) Associated cost.
Problem: 20
Find EOQ if both the RMs purchased together.
Details of RM “X” Details of RM “Y”
A = 10000 kgs A = 20000 kgs
O = Rs. 20 O = Rs. 20
C = 10% C = 10%
Purchase price = Rs. 100 per kg Purchase Price = Rs. 150 per kg.
Problem: 21
Arnav Ltd. manufactures a product X which requires two raw materials A and B in a ratio
of 1:4. The sales department has estimated a demand of 5,00,000 units for the product for
the year. To produce one unit of finished product, 4 units of Material A is required.
Stock Position at the beginning of the year is as below:
Product – X 12,000 units
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MATERIAL COSTING
Material A 24,000 units
Material B 52,000 units
To place an order the company has to spend ₹15,000. The company is financing its working
capital using a bank cash credit @ 13% р.а.
Product X is sold at ₹1,040 per unit. Material A and B is purchased at Rs. 150 and Rs. 200
respectively.
Required:
Compute economic order quantity (EOQ):
a) If purchase order for the both materials is placed separately.
b) If purchase order for the both materials is not placed separately.
Problem: 22
Following details are related to manufacturing concern:
ROL 1,60,000 units
EOQ 90,000 units
Minimum stock level 1,00,000 units
Maximum stock level 1,90,000 units
Average lead time 6 days
Difference between minimum lead time and 4 days
maximum lead time
Calculate:
(i) Maximum consumption per day
(ii) Minimum consumption per day
Problem: 23
If the minimum stock level and average stock level of a particular raw material are 2.000
and 10,000 units respectively, find out its reorder quantity.
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MATERIAL COSTING
Problem: 24
Re-order quantity of material 'X' is 5,000 kg.; Maximum level 8,000 kg.; Minimum usage
50 kg. per hour; minimum re-order period 4 days; daily working hours in the factory is
8hours. You are required to calculate the re-order level of material ‘X’.
Problem: 25
Aditya Ltd. produces a product 'Exe' using a raw material 'Dee'. To produce 1 unit of Exe 2
kg of Dee is required. As per the sales forecast conducted by the company, it will able to sale
10000 units of Exe in the coming year. The following is the information regarding the raw
material Dee:
(i) The Re-order quantity is 200 kg. less than the economic order Quantity
(ii) Maximum consumption per day is 20 kg. more than the average consumption per
day.
(iii) There is an opening stock of 1000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is ₹125 per kg.
There is an opening stock of 900 units of the finished product Exe. The rate of interest
charged by bank on cash credit facility is 13.76%. To place an order company has to incur
₹720 on paper and documentation work. From the above information find out the
followings in relation to raw material Dee:
(a) Re-order quantity.
(b) Maximum stock level.
(c) Minimum stock level.
(d) Calculate the impact on the profitability of the company by not ordering the EOQ.
[Take 364 days for a year].
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MATERIAL COSTING
Problem: 26
ZED Company supplies plastic crockery to fast food restaurants in metropolitan city. One of
its products is a special bowl, disposable after initial use, for serving soups to its customers.
Bowls are sold in pack 10 pieces at a price of ₹50 per pack. The demand for plastic bowl has
been forecasted at a fairly steady rate of ₹40,000 packs every year. The company purchases
the bowl direct from manufacturer at ₹40 per pack within a three days lead time. The
ordering and related cost is ₹8 per order. The storage cost is 10% per annum of average
inventory investment.
Required:
i. Calculate Economic Order Quantity.
ii. Calculate number of orders needed every year.
iii. Calculate the total cost of ordering and storage bowls for the year.
iv. Determine when the next order should be placed. (Assuming that the company
does maintain a safety stock and that the present inventory level is 333 packs with a year
of 360 working days.
Problem: 27
Aditya brothers supplies surgical gloves to nursing homes and polyclinics in the city. These
surgical gloves are sold in pack of 10 pairs at price of ₹250 per pack.
For the month of April 2023, it has been anticipated that a demand for 60,000 packs of
surgical gloves will arise. Aditya brothers purchases these gloves the manufacturer at ₹228
per pack within a 4 to 6 days lead time. The ordering and related cost is ₹240 per order.
The storage cost is 10% p.a. of average inventory investment.
Required to Calculate:
a) Economic Order Quantity.
b) Number of orders needed every year.
c) Total cost of ordering and storage of the surgical gloves.
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MATERIAL COSTING
d) Determine when should the next order to be placed. (Assuming that the company
does maintain a safety stock and that the present inventory level is 14,000 packs with a
year of 360 working days).
Problem: 28
Metaliks Ltd. uses a small casting in one of its finished products. The castings are purchased
from a foundry. Metaliks Ltd. purchases 72,000 castings per year at a cost of ₹1,000 per
casting. The castings are used evenly throughout the year in the production process on a
360-day-per-year basis. The company estimates that it costs ₹11,000 to place a single
purchase order and about ₹500 to carry one casting in inventory for a year. The high
carrying costs result from the need to keep the castings in carefully controlled temperature
and humidity conditions, and from the high cost of insurance.
Delivery from the foundry generally takes 8 days, but it can take as much as 12 days. The
days of delivery time and percentage of their occurrence are shown in the following
tabulation:
Delivery time 8 9 10 11 12
(days)
% of 75 10 5 5 5
occurrence
Required:
a. Compute the economic order quantity.
b. Assume the company is willing to assume a 15% risk of being out of stock. What
would be the safety stock? The re-order point?
c. Assume the company is willing to assume a 5% risk of being out of stock. What
would be the safety stock? The re-order point?
d. Assume 5% stock-out risk. What would be the total cost of ordering and carrying
inventory for one year?
e. Refer to the original data. Assume that using process re-engineering the company
reduces its cost of placing a purchase order to only Rs. 700. In addition, company estimates
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MATERIAL COSTING
that when the waste and inefficiency caused inventories are considered, the true cost of
carrying a unit in stock is Rs. 850 per year.
1. Compute the new EOQ.
2. How frequently would the company be placing an order, as compared to the old
purchase policy?
Problem: 29
RTC Limited uses chemical-X in one of its finished products. The chemical-X is purchased
from a vendor outside India. RTC Limited purchases 36,000 ltr of chemical-X per year at
the rate of Rs. 900 per ltr plus import duty @ 10% on such purchases.
The chemical-X is used evenly throughout the year in the production process on a 360-day-
per-year basis. The company incurs ₹1,75,000 on one year agreement for material supply
with the vendor and it estimates that Rs. 35,000 will be incurred to place a single purchase
order. The chemical-X is needed to be kept in a very carefully controlled temperature and
humidity conditions. RTC Ltd. Incurs 1.5% and 0.276% of the value of inventory as storage
cost and as insurance cost respectively. Delivery from the vendor generally takes 12 days,
but it can take as much as 16 days. The days of delivery time and percentage of their
concurrence are shown in the following tabulation:
Delivery 12 13 14 15 16
Time (days)
Percentage of 70 10 10 5 5
occurrence
Required:
1. Compute the economic order quantity (EOQ)
2. Assume the company is willing to assume a 10% risk of being out of stock. What would
be the safety stock? The re-order point?
3. Assume 5% stock-out risk. What would be the total cost of ordering and carrying
inventory for one year?
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MATERIAL COSTING
Problem: 30
Safety stock = 450units
Total carrying cost = Rs. 405000
Ordering cost = Rs. 9000 per day
Carrying cost per unit = Rs. 300
Find:
(a) EOQ
(b) Total Ordering cost
(c) Associated cost
(d) Annual requirement of Raw material.
Problem: 31
M/S Tyrotubes trades in four-wheeler tyres and tubes. It stocks sufficient quantity of tyres of
almost every vehicle. In year end 2022-23, the report of sales manager revealed that M/s
Tyrotubes experienced stock-out of tyres.
Stock-out of Tyre [Link]
100 2
80 5
50 10
20 20
10 30
0 33
M/S Tyretubes loses ₹150 per unit due to stock-out and spends ₹50 per unit on carrying of
Inventory. Determine optimum safest stock level.
Problem: 32
Premier Company's quarterly sales is 500 units. On 1st January, available stock is 110 units,
which is 10% more than 30th June stock. Raw material required per unit is 10 kgs. On 30 th
June stock of raw material is 900 kgs which is 10% less than 1st January.
Total Ordering Cost based on quarterly purchase ₹80 p.a. Carrying cost p.u is 2 per month.
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MATERIAL COSTING
Total purchase price ₹2/kg.
Expected price of raw material is ₹1.5 per kg.
Compute:
a) Production budget for the 1st half year.
b) Raw material purchase value p.a
c) EOQ
d) Material variances for the year.
e) Will material mix variance and yield variance will arise or not? Explain with reason.
Problem: 33
An invoice in respect of a consignment of chemicals A and B provides the following
information:
Chemical A: 10,000 lbs. At Rs. 10 per lb. Rs. 100000
Chemical B: 8000 lbs. At Rs. 13 per lb. Rs. 104000
Tax Rs. 20,400
Railway Freight Rs. 3,840
Total cost Rs. 2,28,240
A shortage of 500 lbs. in chemical A and 320 lbs. in chemical B is noticed due to normal
breakages. You are required to determine the rate per lb. of each chemical, assuming a
provision of 2% for further deterioration.
Problem: 34
From the records of a company distributing petrol, the following information available, for
the month of March, 2023.
Sales for the month Rs. 79,10,000
Opening Stock as on 01.03.2023 Rs. 1,25,000 litres @ Rs. 30/litre
Purchases:
March 5 1,50,000 litres @ Rs. 31.10/litre
March 27 1,00,000 litres @ Rs. 31.20/litre
Closing stock as on 31.03.2023 1,30,000 litres
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MATERIAL COSTING
General Administration Expenses
For the month of March,2023 172000
From the information given above, work out the following using FIFO and LIFO method of
inventory valuation, assuming pricing of issues being done at the end of the month, after all
receipts during the month:
a. Value of Closing stock as on 31.03.2023
b. Cost of sales for March, 2023
c. Profit or Loss for March, 2023.
Problem: 35
The following are the details of receipt and issue of material ‘CXE’ in a manufacturing Co.
during the month of April 2022:
Date Particulars Quantity Rate per
(kg) kg
April 4 Purchase 3,000 ₹ 16
April 8 Issue 1,000
April 15 Purchase 1,500 ₹ 18
April 20 Issue 1,200
April 25 Return to supplier out of purchase made on April 15 300
April 26 Issue 1,000
April 28 Purchase 500 ₹ 17
Opening stock as on 01.04.2022 is 1,000 kg @ ₹ 15 per kg.
On 30th April, 2022 it was found that 50 kg of material ‘CXE’ was fraudulently
misappropriated by the store assistant and never recovered by the company.
Required:
I. Prepare a store ledger account under each of the following method of pricing the
issue:
a) Weighted Average Method
b) LIFO
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MATERIAL COSTING
II. What would be the value of material consumed and value of closing stock as on
30.04.2022 as per these two methods?
Problem: 36
From the following details, draw a plan of ABC selective control:
Item Units Unit
cost(Rs.)
1 7,000 5.00
2 24,000 3.00
3 1,500 10.00
4 600 22.00
5 38,000 1.50
6 4,000 0.50
7 60,000 0.20
8 3,000 3.50
9 300 8.00
10 29,000 0.40
11 11,500 7.10
12 4,100 6.20
Problem: 37
From the following data for the year ended 31st December, 2022, find FNS
Particular Material A (Rs) Material B (Rs)
Opening Stock 10,000 9,000
Purchase during the year 52,000 27,000
Closing stock 6,000 11,000
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