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Class note for CMA Professional Level –I 102 – Cost Accounting

CMA : Professional Level –I 102: Cost Accounting

Class No. 3 & 4

Class No. 3 & 4

102.03

Costing and Control of Materials

-Classification of Materials; -Accounting for Materials; -Pricing the Issue of Materials Valuation of Inventory; -Periodic Inventory System and Perpetual Inventory System; -Inventory Planning; -Ordering Cost, -Holding Cost and EOQ; -Effect of Quantity Discounts on EOQ; -Safety Stock and Reorder Point; -Material Control Methods; -Impact of JIT on Inventory Accounting; -Materials Requirement Planning System.

Reorder Point; -Material Control Methods; -Impact of JIT on Inventory Accounting; -Materials Requirement Planning System.

Material is anything made of matter, constituted of one or more substances. Wood, cement, hydrogen, air and water are all examples of materials. Sometimes the term "material" is used more narrowly to refer to substances or components with certain physical properties that are used as inputs to production or manufacturing. In this sense, materials are the parts required to make something else, from buildings and art to stars and computers.

else, from buildings and art to stars and computers. Material Cost - price paid for product's

Material Cost - price paid for product's raw materials

Material Cost - price paid for product's raw materials - the cost of the raw materials

-

the cost of the raw materials that go into a product. The material cost of a product excludes any indirect costs, for example, overhead or wages, associated with producing the item.

Classification of Materials:

 

Metals

Polymeric

Ferrous metals and alloys (irons, carbon steels, alloy steels, stainless steels, tool and die steels)

Thermoplastics plastics

Thermoset plastics

Nonferrous metals and alloys (aluminum, copper, magnesium, nickel, titanium, precious metals, refractory metals, superalloys)

Elastomers

 

Ceramics

Composites

Glasses

Reinforced plastics

Glass ceramics

Metal-matrix composites

Graphite

Ceramic-matrix composites

Diamond

Sandwich structures

Concrete

Accounting for Materials

- Purchase of materials Purchase Requisition Purchase Order Receiving Report

- Issuance of materials Materials requisition form

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

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Class note for CMA Professional Level –I 102 – Cost Accounting

note for CMA Professional Level –I 102 – Cost Accounting Purchasing Procedure e (1) (2) Purchase
note for CMA Professional Level –I 102 – Cost Accounting Purchasing Procedure e (1) (2) Purchase
note for CMA Professional Level –I 102 – Cost Accounting Purchasing Procedure e (1) (2) Purchase
note for CMA Professional Level –I 102 – Cost Accounting Purchasing Procedure e (1) (2) Purchase

Purchasing Procedure e

(1)

(2) Purchase Requisition.

(3)

(4) Purchase Orders. (5) Goods Received Note. (6) Inspection of Materials.

Specification of Material.

(6) Inspection of Materials. Specification of Material. Selection of Suppliers. Md.Monowar Hossain FCMA, CPA, ACS,

Selection of Suppliers.

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

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Class note for CMA Professional Level –I 102 – Cost Accounting

Manufacturing vs. nonmanufacturing costs

– Cost Accounting Manufacturing vs. nonmanufacturing costs Pricing the Issue of Materials Valuation of Inventory;

Pricing the Issue of Materials Valuation of Inventory;

Inventory Control: An inventory control system is a process for managing and locating objects or materials. Inventory control is concerned with minimizing the total cost of inventory. Inventory control is the delicate balance of the costs versus profits associated with having stock on hand.

costs versus profits associated with having stock on hand. Inventory Control is the supervision of supply,
costs versus profits associated with having stock on hand. Inventory Control is the supervision of supply,

Inventory Control is the supervision of supply, storage and accessibility of items in order to ensure an adequate supply without excessive oversupply. It can also be referred as internal control - an accounting procedure or system designed to promote efficiency or assure the implementation of a policy or safeguard assets or avoid fraud and error etc.

a policy or safeguard assets or avoid fraud and error etc. Md.Monowar Hossain FCMA, CPA, ACS,

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

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Class note for CMA Professional Level –I 102 – Cost Accounting

Formula for Materials: Normally Sto ck of material is valued either at cost price or Mar ket Price whichever is lower.

Under the Cost Price criteria method like

- FIFO [First In First Out],

- LIFO [Last In First Out],

- Weighted Average,

- Simple Average are used.

LIFO
LIFO

The above approaches are related to calculation & valuation of material stock. However it is equally important to control the material cost. For contr olling the cost, it is necessary to decide how much s hould be purchased, when to purchased, what should be s tock level, how much discount should be demanded from the supplier etc. It is also necessary to keep check ov er material turnover. For controlling the material cost .

ov er material turnover. For controlling the material cost . 1) Reorder level - It represents

1) Reorder level - It represents that level of stock of which fresh quantity of material sho uld be purchased. The Purchased Quantity will be EOQ.

Reorder level = Maxi mum usage x Maximum lead time

(Or)

= Minim um level + (Average usage x Average Lead time)

2) Minimum Stock Level : It represe nt Minimum Qty of stock which should be maintaine d by Organization

Minimum level = Reo rder level – (Average usage x Average lead time)

3) Maximum Stock Level : It represe nt maximum Qty of stock which should be maintain ed by Organization.

Maximum level = Reo rder level + Reorder quantity – (Minimum usage x M inimum lead time)

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

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Class note for CMA Professional Level –I 102 – Cost Accounting

4) Average level = Minimum level +M aximum level

5) Danger level (or)

2

(or) Minimum level + ½ Reor der quantity

Safety stock level = Minimum us age x Minimum lead time (preferred) OR

= Average usa ge x Average lead time OR

= Average usa ge x Lead time for emergency purposes

6) EOQ (Economic Order Quantity - Wilson’s Formula) = 2AO/C Where A = Annual usage units

O

= Ordering cost per un it

C

= Annual carrying cost of one unit

i.e. Carrying cast % x Ca rrying cost of unit

7) Associated cost = Buying cost pa + Carrying cost per annam

8) Under EOQ Buying cost = Carryi ng cost

9) Carrying Cost

= Average inventory x Carrying co st per unit pa x Carrying cost % OR

= Average Inventory x Carrying co st per order pa 10) Average inventory = EOQ/2

11) Buying cost = Number of Orders x ordering cost

12) Number of Orders = Annual Dem and / EOQ

13) Inventory Turnover (T.O) Ratio = Material consumed Average Inventory

14) Inventory Turnover Period =

365

.

In ventory Turnover Ratio

ECONOMI

C ORDER QUANTITY (EOQ) OR QUANTITY (ROQ) t the quantity of material which purchased each time. These economical from the angle of es & ordering cost.

REORDER

It represen

should be

quantity is

the storag

cost. REORDER It represen should be quantity is the storag Where A = Annu al Consumption

Where

A

= Annu

al Consumption of Qty

= Buyi order CS = Cost for 1

B

ng cost OR cost of placing one

.

of storing one unit of material

year.

If

the cost

of the Investment is given then

such cost a

lso will be part of CS

Note :- Wh

enever Discount Factor given in

a

problem.

These Formula will not be apply ting EOQ.

for calcula

15) Safety Stock = Annual Demand

365

x(Maximum lead time - Average lead time)

16) Total Inventory cost = Ordering cost + Carrying cost of inventory +Purchase cost

17) Input Output Ratio = Quantity of input of material to production Standard m aterial content of actual output Remarks : 1) High Inventory Turno ver Ratio indicates that the material in the questi on is fast moving 2) Low Inventory Turnov er Ratio indicates over investment and locking u p of working Capital in inventories

investment and locking u p of working Capital in inventories Md.Monowar Hossain FCMA, CPA, ACS, ACA

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

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Class note for CMA Professional Level –I 102 – Cost Accounting

Pricing of material Issues:-

1) Cost price method:-

a) Specific price method

b) First in First Out method (FIFO)

c) Last in First Out method (LIFO)

d) Base stock method

2) Average price method:-

a) Simple average price method =

b) Weighted average price method =

Reorder Period OR Delivery Period OR Lead Time :- It represent the time gap involves between placement of order & Actual Receiving of the Delivery. Such Period is again divided into Maximum Period, Minimum Period, Average Period & Emergency Period.

Total unit price Total No. of purchases

Total cost Total No. of units

c) Periodic simple average price method = Total unit price of certain period Total Number of purchases of that period (This rate is used for all issues for that period. Period means a month (or) week (or) year)

d) Periodic weighted average price method =

Total cost of certain period Total Number of units of that period

e) Moving simple average price method

= Total of periodic simple average of certain number of periods Number of periods f) Moving weighted average price method = Total of periodic weighted average of certain number of periods Number of periods

3) Market price method:- a) Replacement price method = Issues are valued as if it was purchased now at current market price b) Realizable price method = Issues are valued at price if it is sold now

4) Notional price method:-

a) Standard price method = Materials are priced at pre determined rate (or) Standard rate

b) Inflated price method

= The issue price is inflated to cover the losses incurred due to natural (or)

climatic losses 5) Re use price method = When materials are returned (or) rejected it is valued at different price.

There is no final procedure for this method.

ABC Analysis (or) Pareto Analysis :- In this materials are categorized into

Particulars

Quantity

Value

A” – Important material

10%

70%

B” – Neither important nor unimportant

20%

20%

C” – Un-important

70%

10%

Note:-

1) Material received as replacement from supplier is treated as fresh supply 2) If any material is returned from Department after issue, it has to be first disposed in the next issue of material 3) loss in the book balance of stock and actual is to be transferred to Inventory adjustment a/c and from there if the loss is normal it is transferred to Over Head control a/c. If it is abnormal it is transferred to costing profit and loss a/c. 4) CIF = Cost Insurance and Freight (This consignment is inclusive of prepaid insurance and freight) 5) FOB = Free on Board (Materials moving by sea – insurance premium is not paid) 6) FOR = Free on Rail (Insurance and freight is not borne by the supplier but paid by the company or purchase)

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

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Class note for CMA Professional Level –I 102 – Cost Accounting

7) For each receipt of goods = Goods Receipt note 8) For each issue of goods = Materials Requisition note (or) Material Issue note

Accounting Treatment :-

1) Normal Wastage = It should be distributed over goods output increasing per unit cost 2) Abnormal Wastage= It will be charged to costing profit and loss a/c 3) Sale value of scrap is credited to costing profit and loss a/c as an abnormal gain. 4) Sale proceeds of the scrap can be deducted from material cost or factory overheads. 5) Sale proceeds of scrap may be credited to particular job. 6) Normal Defectives = cost of rectification of defectives should be charged to specific 7) Abnormal Defectives = this should be charged to costing profit and loss a/c 8) Cost of Normal spoilage is to borne by good units 9) Abnormal spoilage should be charged to costing profit and loss a/c

Periodic Inventory System and Perpetual Inventory System

Periodic Inventory - Periodic inventory is a method wherein any inventory sold is physically counted at the end of an accounting period, deducted from the beginning inventory plus inventory purchases, and the difference moved to the cost-of-goods-sold (COGS) account. A complete physical counting under a periodic inventory system is usually done at specific times of the year, such as quarterly or annually, depending on the business.

This is a simple method, but it does not allow the business to maintain accurate information regarding inventory problems or shortages.

- Inventory account and cost of goods sold are non-existent until the physical count at the end of the year.

- Purchases account is used to record purchases.

- Purchase Return account is used to record Purchases Returns account.

- Cost of goods sold or cost of sale is computed from the ending inventory figure

- For goods returned by customers there are no inventory entries.

goods returned by customers there are no inventory entries. Perpetual Inventory - Perpetual inventory is the

Perpetual Inventory -

Perpetual inventory is the continuous calculation of inventory. Businesses update inventory with each purchase and deduct inventory after each sale. This method allows for an accurate inventory measurement on a daily basis.

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

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Class note for CMA Professional Level –I 102 – Cost Accounting

Additionally, the inventory may be ph ysically counted frequently throughout this process t o ensure that the accounting information matches the p hysical amount on hand.

- Account and the balance of costs of goods sold and inventory account exist all the time.

- No individual purchases account but t the purchases are recorded in the Inventory Accou nt.

- No individual Purchase Returns acc ount but the purchases return are recorded in the In ventory Account.

- Record cost of goods sold/cost of sa le – inventory is reduced when there is a sale.

- Returns from customers are recorde d by reducing the cost of goods sold and adding ba ck into inventory.

the cost of goods sold and adding ba ck into inventory. Inventory Planning: Md.Monowar Hossain FCMA,

Inventory Planning:

sold and adding ba ck into inventory. Inventory Planning: Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

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Friday, March 07, 2014

Class note for CMA Professional Level –I 102 – Cost Accounting

Ordering Cost: Total of expe nses incurred in placing and order.

Cost: Total of expe nses incurred in placing and order. Holding Cost / carrying charge Holding
Holding Cost / carrying charge Holding cost is money spent to keep and maintain a
Holding Cost / carrying charge
Holding cost is money spent to keep and maintain a stock of
goods
in storage.
1. Financial and operational expens e associated with an
investment.
2. Finance, insurance, security, spo ilage, storage, and other
such charges associated with wa rehousing of goods.
3. Interest and lender imposed char ges such as negotiation
fee, processing fee, penalties, as sociated with a loan.
4. Interest and other charges assoc iated with goods or
services sold on credit.

EOQ - Economic order quantity is t he level of inventory that minimizes the total invento ry holding costs and ordering costs. EOQ is that size of t he order which gives maximum economy in purchasi ng any material and ultimately contributes towards mainta ining the materials at the optimum level and at the m inimum cost. In other words, the economic order quantity (EOQ) is the amount of inventory to be ordered at o ne time for purposes of minimizing annual inventory cost.

As an example, in a company where order cost is estimated at Tk. 10 and

As an example, in a company where order cost is estimated at Tk. 10 and with a holding cost of 25% of item value if annual d emand is 1,000 units at a supply price of Tk.36, if we substitute these figur es in the EOQ formula then the EOQ is 48 units

is 1,000 units at a supply price of Tk.36, if we substitute these figur es in
is 1,000 units at a supply price of Tk.36, if we substitute these figur es in

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

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Class note for CMA Professional Level –I 102 – Cost Accounting

Effect of Quantity Discounts on EOQ: The EOQ-Model of inventory problem can determine ordering cycle and quantity. When the purchase unit price is constant, ordering cycle and ordering quantity, which minimize the one day's average inventory cost, is not dependent on the purchase price. But if purchase price may change, the EOQ-Model must be modified. The purchase unit price is discounted as the ordering becomes larger. The discount of purchase price is described with a decreasing function of ordering quantity. This function is not always continuous with respect to the ordering quantity. Under this condition one day's average profit can be defined. And we can determine ordering cycle and ordering quantity, which maximize one day's average profit. Moreover, we consider the situations under which the setup cost depends on the ordering quantity. In this case the setup can be described with the increasing function of ordering quantity. We show that the EOQ-Model can be applied if it is modified by introducing the continuous setup cost function. This function is not differentiable at some levels of ordering quantity.

is not differentiable at some levels of ordering quantity. Safety Stock and Reorder Point Safety stock

Safety Stock and Reorder Point Safety stock (also called buffer stock) is a term used by logisticians to describe a level of extra stock that is maintained to mitigate risk of stockouts (shortfall in raw material or packaging) due to uncertainties in supply and demand.

or packaging) due to uncertainties in supply and demand. The reorder point is the level of

The reorder point is the level of inventory when a fresh order should be made with suppliers to bring the inventory up by the EOQ.

be made with suppliers to bring the inventory up by the EOQ. Md.Monowar Hossain FCMA, CPA,

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

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Class note for CMA Professional Level –I 102 – Cost Accounting

note for CMA Professional Level –I 102 – Cost Accounting -Material Control Methods; -Impact of JIT

-Material Control Methods;

-Impact of JIT on Inventory Accounting;

Just-in-time (JIT) is an inventory strategy that strives to improve a business's return on investment by reducing in-process inventory and associated carrying costs.

-Materials Requirement Planning System.

Question-3: Explain, why the Last in First out (LIFO) is better than First in First out (FIFO) or any other method of pricing material issues.

Answer-3 : LIFO has following advantages:

(a)

The cost of the material issued will be reflecting the current market price.

(b)

The use of the method during the period of rising prices does not reflect high profit in the income statement

because the cost is also high.

(c) In the case of falling price, profit rise due to less cost, yet the finished goods at market price. i.e. low price.

The profit will decrease.

(d) During the period of inflation, LIFO will show the correct profit.

Question-4 : Discuss ABC analysis as a technique of inventory control. Answer-4 : ABC Analysis as a technique of Inventory Control:

It is a system of inventory control. It exercises control over different items of stores classified on the basis of cost. It is a system of Inventory control. In this system the items are divided into three categories namely “A”, “B” and “C” according to their importance, cost, and percentage of usage. ‘A’ category of items (units) consists of only a small percentage i.e. about 10% of total items (units) handles by the stores but require heavy investment about 70% of inventory value, because of their high price or heavy requirement or both.

‘B’ category of items (units) are relatively less important – 20% of the total items (units) of material handled by stores and % of investment required is about 20% of total investment in inventories.

‘C’ category – 70% of total items (units) handled and 10% of value. For ‘A’ category items (units), stocks levels and EOQ are used and effective monitoring is done. For ‘B’ category same tools as in ‘A’ category are applied. For ‘C’ category of items, there is no need of exercising constant control. Orders for items in this group may be placed after 6 months or once in a year, after ascertaining consumption requirement.

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

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Class note for CMA Professional Level –I 102 – Cost Accounting

Question-5 : Write short notes on Assumptions in calculating EOQ quantity. Answer-5 : Assumptions in calculating EOQ Quantity

It is assumed that carrying costs are based on the average inventory

The annual usage is known and is assumed to be constant.

The ordering cost per order remains constant and it varies directly with the number of orders.

The cost per unit to be purchased is known in advance and is assumed to be constant during the year.

Question 06 :

(a)

You just joined a company. The company set up a department to deal with stock control.

(b)

Your boss asked you to narrate the functions of the stock controller and the importance that this department must operate efficiently.

Answer-06 :

(a)

Function of the stock controller:

· Management of storehouses

· Accepting or rejecting materials after inspection and checking

· Responsibility for the recording of receipts ad issues of materials on the bin cards

· Preparation of purchase requisitions in respect of low stocks

· Issuing materials on the authority of material requisitions

· Responsibility for the safe custody and protection of stock so as to avoid loss and deterioration.

(b) Reasons why the stock control function must be efficiently performed:

· Production departments need a balanced flow of materials to suit their requirements

· Excessive handling must be avoided as this increases the cost but not the value of the goods

· Efficient handling improves productivity

· Faulty storage leads to deterioration of materials.

Question 07 :

If you should decide to install a system of perpetual inventory and continuous stocktaking, what advantages would you expect the company to receive?

Answer-07:

· A stricter control of stock helps to reduce the loss due to pilferage and wastage

· Deterioration and other storage faults are detected earlier and losses may be avoided

· Records will provide information for determination of maximum and minimum stock and will enable optimum

order size to be established

· Interim accounts can be prepared without special stocktaking

· With continuous stocktaking the perpetual records can be used and the dislocation of annual stocktaking can be avoided.

Question-08: Give three problems met in determining the economic order quantity.

(a) The rate of consumption or usage. This can be found by referring to past records or by an estimate based on production and sales expected in the future (b) Cost of re-ordering. This is not an easy calculation , due to the variety of work carried out in the purchasing department for different products and for different purposes, but a figure has to

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

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Class note for CMA Professional Level –I 102 – Cost Accounting

be placed on the cost of dealing with orders and the expenses of receiving and inspecting the goods. (c) The storage and holding cost. This includes the interest on capital invested in stock, together with other charges such as those of deterioration and obsolescence, insurance and certain handling costs

Advantages of LIFO Costing

Following advantages are associated with LIFO costing method:

The rationale of charging most recent costs to the current period production and be compared to the current period revenues results in a systematic and realistic pricing of material consumed.

Another benefit of LIFO costing is that it minimizes the unrealized gains and losses of inventory and industries facing fast material price fluctuations can stabilize their reported operating profits.

As in LIFO costing current period inflationary prices of raw material are charged to cost of production and are deducted from revenues, therefore it reduces the profit figure resulting in tax savings. This cash saving advantage enhances the working capital of the firm.

Disadvantages of LIFO Costing

Following disadvantages are associated with LIFO costing method:

Regulatory bodies often adopt strict measure as a check over LIFO method. In some cases LIFO costing technique is even restricted due to reduction in tax collections to the internal revenue services.

Record keeping requirements under LIFO are substantially higher than any other method of inventory costing.

Deterioration or decay of material is maximized due to early use of the latest purchases and latest use of the oldest receipts.

The Cost Accounting Standards Board does not recognize the use of LIFO method except in some special cases.

Due to accelerated rate of inflation in the last few years the adoption of LIFO costing technique gained some appeal from industries but the decision to adopt LIFO should be taken abruptly without keeping its long term repercussions.

taken abruptly without keeping its long term repercussions. Question -09: CMA Examination –Aug-2012 There are 5

Question -09: CMA Examination –Aug-2012

There are 5 Rs in material Management. What these 5Rs stand for? No elaboration is required. Answer-09: 1. Right quality 2. right quantity 3. right place 4. right time 5. right price

Level-I, COA, Q2(a):

Objectives or goals of purchasing function : Primary objective or goal of purchasing function is making inputs available to the conversion process at minimum cost to the final output of the company. Thus focus is on

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

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Class note for CMA Professional Level –I 102 – Cost Accounting

system output rather than on micro level objectives. The inputs to be made available are raw materials, semi finished items, bought out items etc. There are certain parameters to be monitored for fulfilling the system objectives. We can call them goals of purchasing. These goals are popularly known as 5R’s of purchase namely, right price, right quantity, right quality, right place and right time. In simple terms, if the above 5Rs are achieved primary objective is fulfilled:-

Right Price: Right price is determined by costing the production process of the supplier. Right price is determined by allowing reasonable profit for the supplier and insisting and helping to reduce cost. Tender system should be used to identify lowest responsible bidder rather than lowest bidder. Principles normally used to ensure right price are cost structure and learning curve.

Right Quantity: Right quantity of purchase is the one that ensures no excess and no shortage. High priority items are subjected to EOQ analysis to determine the right quantity for purchase. This ensures overall minimum cost for inventory.

Right Quality: In an item purchased should ensure adhering to mutually accepted standard by supplier and customer at the time of finalizing the purchase order. The accepted standard may be a drawing, a sample, a grade or a universal standard like DIN, IS, BS etc.

Right Place: is the one where the item is going to enter the value stream. If the item is not available here, when needed, it is in short supply for the process.

Right Time: is as decided by production schedule for meeting customer’s requirements

Problem No. 03 :( Materials) - CMA Examination: Level-I , Q: 1 (c ) December-2008 (Marks: 8)

ABC company has obtained the following costs and other data for one of its materials:

Working day per year

 

250

Normal use per day

500

units

Maximum use per day

600

units

Minimum use per day

100

units

Lead time

5 days

Variable cost of placing one order

Tk. 36

Variable carrying cost per unit per year

 

Tk. 4

Required: compute the following:

1. Economic order quantity

2. Safety stock (maximum)

3. Order point

4. Normal maximum inventory

5. Absolute maximum inventory

Problem No. 04 :( Materials) Monyem Ltd. are the manufacturers of picture tubes for T.V. The following are the details of their operation during 2013:

Average monthly market demand Inventory carrying cost Ordering cost Cost of tubes Normal usage Minimum usage Maximum usage Lead time to supply

Compute from the above:

(1) Economic Order Quantity. If the supplier is willing to supply quarterly 1,500 units at a discount of 5%, is it worth accepting? (2) Maximum level of stock (3) Minimum level of stock (4) Reorder level

2,000 Tubes 20% per annum Tk. 100 per order Tk. 500 per tube 100 tubes per week 50 tubes per week 200 tubes per week 6-8 weeks

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

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Class note for CMA Professional Level –I 102 – Cost Accounting

Problem No. 05 : (Materials) Monowar Limited uses a small casting in one of its finished products. The castings are purchased from a foundry. Monowar Limited purchases 54,000 castings per year at a cost of Tk.800 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 Tk.9,000 to place a single purchase order and about Tk.300 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 6 days, but it can take as much as 10 days. The days of delivery time and percentage of their occurrence are shown in the following tabulation:

Delivery time (days)

:

6

7

8

9

10

Occurrence

:

75%

10%

5%

5%

5%

Required:

(I)

Compute the economic order quantity (EOQ).

(ii)

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?

(iii)

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?

(iv)

Assume 5% stock-out risk. What would be the total cost of ordering and carrying inventory for one year?

(v)

Refer to the original data. Assume that using process re-engineering the company reduces its cost of

placing a purchase order to only Tk. 600. In addition company estimates that when the waste and inefficiency

caused by inventories are considered, the true cost of carrying a unit in stock is Tk.720 per year.

(I)Compute the new EOQ. (II) How frequently would the company be placing an order, as compared to the old purchasing policy?

Problem No. 06 : (Materials)

The following information is extracted from the store ledger:

Material – B

Date

Descriptions

 

Feb. 01

Opening stock

Nil

Feb. 01

Purchases

100

units @ Tk. 1 per unit

Feb. 20

Purchases

100

units @ Tk. 2 per unit

Feb. 22

Issues for production

60

units for Job No. W

Feb. 23

Issues for production

60

units for Job No. X

Complete the receipts and issues valuation by adopting the First In First Out (FIFO), Last In Last Out (LIFO) and the Weighted Average Method.

Problem No. 07 ( Materials)

The books of Farhana AB Ltd. present the following data for the month of August, 2013. Direct labour cost Tk. 17,500 being 175% of works overheads. Cost of goods sold excluding administrative expenses Tk. 56,000. Inventory accounts showed the following opening and closing balance:

 

01 –Aug-13

31-Aug-13

(Tk.)

(Tk.)

Raw materials Works in progress Finished goods

8,000

10,600

10,500

14,500

17,600

19,000

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

Page - 38

Friday, March 07, 2014

Class note for CMA Professional Level –I 102 – Cost Accounting

Other data are :

(Tk.)

Selling expenses General and administration expenses Sales for the month

3,500

2,500

75,000

You are required to:

(a)

Compute the value of materials purchased

(b)

Prepare a cost statement showing the various elements of cost and also the profit earned.

Problem No. 08: (Inventory Turnover)

The following data are available in respect of material X for the year ended 31 st December 2013:

Opening Stock

Tk. 90,000

Purchases during the year

2,70,000

Closing stock

1,10,000

Calculate: a. Inventory turnover ratio b. The number of days for which the average inventory held.

Problem No. 09: (Inventory – E.O.Q)

About 50 items are required every day for a machine. A fixed cost of Tk. 50 per order is incurred for placing an order. The inventory carrying cost per item amounts to Tk. 0.02 per day. The lead period is 32 days.

Compute: (a) Economic Order Quantity (b) Re-order level

Problem No.10: (Application of Cost Concept)

Farhana Ltd. has recorded the following data in the two most recent periods:

Total cost of production Tk.

Volume of Production (Units)

14,600

800

19,400

1200

What is the best estimate of the company’s fixed costs per period?

Problem No. 11: (Inventory – E.O.Q)

You are given the following data relating to MMH Ltd.:

Cost of placing each order (i.e. Ordering Cost)

Tk. 4.50

Annual demand (i.e. Annual Consumption)

8,000 units

Stock holding cost as a percentage of average Stock value (i.e. Inventory Carrying charges)

16%

Price per unit

Tk. 5

Normal lead time

9 days

Safety stock

18 days

Maximum Usage From the above, calculate:

60 units

(i) What is the quantity that should be ordered each time?

(ii)

How many orders should be placed with the supplier during a year?

(iii)

What would be the level of stock just before the material which has been ordered is received?

(iv) When should the material be ordered? (under certainty).

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

Page - 39

Friday, March 07, 2014

Class note for CMA Professional Level –I 102 – Cost Accounting

Solutions of problem no. 03 : (materials)

Ans. 1. Economic Order Quantity

problem no. 03 : (materials) Ans. 1. Economic Order Quantity EOQ = √ 2AO / C

EOQ = 2AO / C

= 2 x 125,000 x 36 / 4

= 22,50,000

= 1,500 units Ans.

1. Safety stock (maximum)

Maximum use per day …………………………………………………………. 600 units Normal use per day ………………………………………………….…………… 500 units

Safety stock (Maximum) …………

100 units x 5 days lead time = 500 units Ans.

…………………………………

………

2. Order point

Normal use per day (500 units) x Lead time ( 5 days) ………………………… 2,500 units

Add: Safety stock …………………………………………………………………….

Order point ……………………………………………………………………………. 3,000 units

500 units

Ans.

3. Normal maximum inventory Order point …………………………………………………………………………

3,000 units

Less: Normal use during lead time ……………………………………………….

2,500

On hand at time order received …………………………………………………

500 units

Add: Quantity ordered ………………………………………………………….…

1,500

Normal maximum inventory ……………………………………………………….

2,000 units

Ans.

4. Absolute maximum inventory Order point …………………………………………………………………………

3,000 units

Less: Minimum use during lead time …………………………………………

500

On hand at time order received …………………………………………………

2,500 units

Add: Quantity ordered ………………………………………………………….…

1,500

Absolute maximum inventory ……………………………… …………………….

4,000 units

Ans.

Solutions of problem no. 04 : (materials) Ans: (1) S= Annual usage of tubes = Normal usage per week × 52 weeks

= 100 tubes × 52 weeks

= 5,200 tubes

Co=Ordering cost per order = Tk.100/- per order C1=Cost per tube = Tk. 500/- iC1=Inventory carrying cost per unit per annum =20% × Tk.500 = Tk.100/- per unit, per annum

Economic order quantity:

= Tk.100/- per unit, per annum Economic order quantity: Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

Page - 40

Friday, March 07, 2014

Class note for CMA Professional Level –I 102 – Cost Accounting

The supplier is willing to supply 1500 units at a discount of 5%, is it worth accepting Total cost (when order size is 1500 units) = Cost of 5,200 units + Ordering cost + Carrying cost.

5,200 units

1

=5,200 units × Tk. 475 + ----------------- x Tk. 100 + ------- × 1,500 units × 20% × Tk. 475

1,500 units

2

= Tk. 24,70,000 + Tk. 346.67 + Tk. 71,250 =Tk. 25,41,596.67

Total cost (when order size is 102 units)

5,200 units

1

=5,200 units × Tk. 500 + ----------------- x Tk. 100 + ------- × 102 units × 20% × Tk. 500

102 units

2

= Tk. 26,00,000 + Tk. 5,098.03 + Tk. 5,100 = Tk. 26, 10,198.03

Since, the total cost under quarterly supply of 1,500 unit with 5% discount is lower than that when order size is 102 units, therefore the offer should be accepted. While accepting this offer consideration of capital blocked on order size of 1,500 units per quarter has been ignored.

(2)Minimum level of stock =Re-order level + Reorder quantity – Min. usage × Min. reorder period =1,600 units + 102 units – 50 units × 6 weeks =1,402 units.

(3)Minimum level of stock =Re-order level – Normal usage × Average reorder period =1,600 units – 100 units × 7 weeks = 900 units.

(4)Reorder level =Maximum consumption × Maximum re-order period =200 units × 8 weeks =1,600 units

Solutions of problem no. 05 : (materials)

Ans. (I) Computation of economic order quantity (EOQ) A=Annual requirement = 54,000 castings C= Cost per casting = Tk. 800 O= Ordering cost = Tk. 9,000 per order (c × i) = Carrying cost per casting p.a = Tk.300

per order (c × i) = Carrying cost per casting p.a = Tk.300 = 1,800 casting

= 1,800 casting

(ii) Safety stock (Assuming a 15% risk of being out of stock) Safety stock for one day = 54,000/360 days = 150 castings

Re-order point = Minimum stock level + Average lead time × Average consumption

= 150 + 6 × 150 = 1,050 castings.

(iii) Safety stocks (Assuming a 5% risk of being out of stock) Safety stock for three days = 150× 3 days = 450 castings

Re-order point = 450 casting + 900 castings = 1,350 castings

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

Page - 41

Friday, March 07, 2014

Class note for CMA Professional Level –I 102 – Cost Accounting

(iv) Total cost of ordering = (54,000/1,800) × Tk. 9,000 = Tk.2,70,000 Total cost of carrying = (450 + ½ × 1,800) xTk.300 = Tk. 4,05,000

(v) (I) Computation of new EOQ:

xTk.300 = Tk. 4,05,000 (v) (I) Computation of new EOQ: = 300 castings (II) Total number

= 300 castings

(II)Total number of orders to be placed in a year are 180. Each order is to be placed after 2 days (1 year = 360 days). Under old purchasing policy each order is placed after 12 days.

Solutions of problem no. 06 : (materials)

Ans.

Stores Ledger (Material -B) Under FIFO method

     

Receipts

 

Issues

 

Balance

Particulars /

 

Rate per

Amou

 

Rate

Amou

 

Rate per

 

Date

Reference

Qnt.

unit

nt

Qnt.

per

unit

 

nt

Qnt.

unit

Amount

Unit

Tk.

Tk.

Unit

Tk.

Tk.

 

Unit

Tk.

Tk.

Feb. 01

Opening Balance

-

-

-

-

-

 

-

-

-

-

Feb. 01

Purchases

100

1.00

100

-

-

-

100

1.00

100

Feb. 20

Purchases

100

2.00

200

-

-

-

100

1.00

100

 

100

2.00

200

Feb. 22

Issues for Job-W

-

-

-

60

1.00

 

60

40

1.00

40

 

100

2.00

200

Feb. 23

Issues for Job-X

-

-

-

1.00

80

2.00

160

40

40 60

60

2.00

80

40 60 2.00 80 40

40

20

 

40

 

Stores Ledger (Material -B) Under LIFO method

 
     

Receipts

 

Issues

 

Balance

Particulars /

 

Rate per

Amou

 

Rate

Amou

 

Rate per

Amou

Date

Reference

Qnt.

unit

nt

Qnt.

per

unit

 

nt

Qnt.

unit

nt

Unit

Tk.

Tk.

Unit

Tk.

Tk.

 

Unit

Tk.

Tk.

Feb. 01

Opening Balance

-

-

-

-

-

 

-

-

-

-

Feb. 01

Purchases

100

1.00

100

-

-

-

100

1.00

100

Feb. 20

Purchases

100

2.00

200

-

-

-

100

1.00

100

 

100

2.00

200

Feb. 22

Issues for Job-W

-

-

- 2.00

60

120

 

100

1.00

100

 

40

2.00

80

Feb. 23

Issues for Job-X

-

-

- 2.00

80

1.00

80

40

 

80

60

60

1.00

100

100

20

20

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

Page - 42

Friday, March 07, 2014

Class note for CMA Professional Level –I 102 – Cost Accounting

Stores Ledger (Material -B) Under Weighted Average method

     

Receipts

 

Issues

 

Balance

Particulars /

 

Rate per

Amou

 

Rate

Amou

 

Rate per

Amou

Date

Reference

Qnt.

unit

nt

Qnt.

per

unit

nt

Qnt.

unit

nt

Unit

Tk.

Tk.

Unit

Tk.

Tk.

Unit

Tk.

Tk.

Feb. 01

Opening Balance Purchases Purchases Issues for Job-W Issues for Job-X

-

-

-

-

-

-

-

-

-

Feb. 01

100

1.00

100

-

-

-

100

1.00

100

Feb. 20

100

2.00

200

-

-

-

200

1.50

300

Feb. 22

- -

- 1.50

60

90

140

1.50

210

Feb. 23

- -

- 1.50

60

90

80

1.50

120

Solutions of problem no. 07 : (materials)

Ans: (a) Computation of the value of materials purchased (Tk.)

Cost of goods sold Add: Closing stock of finished goods

56,000

19,000

 

75,000

Less: Opening stock of finished goods Cost of goods manufactured Add: Closing stock of works-in-progress

17,600

57,400

14,500

 

71,900

Less: Opening stock of work-in-progress Works Cost Less: Factory Overhead:

10,500

61,400

10,000

[ 100/175 of Direct Labour Cost] Prime Cost Less: Direct Labour Raw materials consumed Add: Closing stock of raw materials Raw materials available Less: Opening stock of raw materials Value of materials purchased

51,400

17,500

33,900

10,600

44,500

8,000

36,500

Ans: (b) Cost Statement showing the various elements of Cost and Profit Earned

Raw material consumed (Refer to Statement (a) above)

33,900

Direct labour cost

17,500

Prime Cost

51,400

Add: Factory Overheads

10,000

Works Cost

61,400

Add: Opening Work-in-progress

10,500

71,900

Less: Closing Work-in-progress

14,500

Cost of goods manufactured

57,400

Add: Opening stock-of finished goods

17,600

75,000

Less: Closing stock of finished goods

19,000

Cost of Goods Sold

56,000

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

Page - 43

Friday, March 07, 2014

Class note for CMA Professional Level –I 102 – Cost Accounting

Add: General and administration expenses Add: Selling expenses Cost of Sales Profit (Balance figure Tk.75,000 – Tk.62,000) Sales

2,500

3,500

62,000

13,000

75,000

Solutions of problem no. 08 (Inventory Turnover)

(a)

Inventory Turnover Ratio

= Raw Material Consumed / Average Inventory = 2,50,000/1,00,000 = 2.5 Times

(b)

No. of days for which Average inventory is held =Days in a year/ITR = 360/2.5 = 144 Days

Notes:

1. Raw material consumed = Opening Stock + Purchases – Closing Stock = 90,000 + 2,70,000 – 1,10,000 = Tk. 2,50,000

2. Average Inventory = (Opening Stock + Closing Stock) / 2 = (90,000 + 1,10,000) / 2 = Tk. 1,00,000

Solutions of problem no. 09 : (Inventory – E.O.Q)

(a)

EOQ = 2 x A x O / C = [2(50 x 365)] x 50 / (0.02 x 365) = 250000 = 500 units

(b)

Re–order level = Maximum Consumption x Maximum Delivery Period = 50 x 32 = 1600 units

Solutions of problem no. 10 : Solution of problem-8: (Application of Cost Concept)

Variable Cost per unit

= Change in Total Cost / Change in Production = (Tk. 19,400 – Tk. 14,600)/(1200 units – 800 units)= 4800/400 = Tk. 12 per unit

Total variable cost for 1200 units = 1200 units x Tk. 12

Total fixed cost = Total cost – Total Variable Cost = 19,400 – 14,400 = Tk. 5,000

= Tk. 14,400

Solutions of problem no.11 : (Inventory – E.O.Q)

(i) Economic Order Quantity is the quantity that should be ordered each time:

EOQ = − − −

2

Where,

c = Cost of placing each order

d = Annual demand

i = Stock holding cost as a percentage of average stock value

p = Price per unit

=

2 4.5 8,000 − − − − − − − − − − −

16

− −

5

100

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

Page - 44

Friday, March 07, 2014

ii)

(iii)

Class note for CMA Professional Level –I 102 – Cost Accounting

= − − − − − −

72,000

0.6 5

= 90,000

= 300 units.

Number of Orders to be placed in a year =

= ,

=

27 orders.

Safety stock is the level of stock immediately before the material ordered is received

Safety Stock = Average Usage x Period for which safety stock is kept

=

,

x 18 days = 400 units

(iv) When stock reaches the reorder level, material should be ordered.

Reorder Level = Maximum Usage x Maximum Lead Time = 60 x 9 days = 540 units.

The above gives us reorder level under certainty, since the above formula assumes that average usage and lead time are constant.

Md.Monowar Hossain FCMA, CPA, ACS, ACA Audit Consultant (General Manager), Rupali Bank Ltd. eMail: md.monowar@gmail.com

Page - 45

Friday, March 07, 2014