SOLUTIONS TO ASSIGNMENT PROBLEMS. Problem No. 1. Problem No. 2

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1 No. for A/WA & ME/E MASTER MINDS. MATERIALS AS EOQ A Units consumed during year S Ordering cost per order Inventory carrying cost per unit per annum. EOQ X0,000 X50 X8 SOLUTIONS TO ASSIGNMENT PROBLEMS Problem No. X0,000 X50 X5 EOQ,500 kg. 4 Totalconsumptionof materialsper annum No. of orders to be placed in a year EOQ 0,000 kg.,500 kg. 4 Orders per year Problem No. a) Total Annual ost in Existing Inventory Policy Ordering cost (6 ` 5) 50 arrying cost of average inventory (36,000 6) 6,000 units per order Average inventory 3,000 units arrying cost 0% of ` 3,000 3, Total cost A 750 b) Total Annual ost in E.O.Q EOQ X36,000 X units X0% No. of orders 36,000 3,000 units orders Ordering cost ( ` 5) 300 arrying cost of average inventory (3, ) 300 Total ost B 600 Savings due to EOQ ` ( ) (A B) 50 Note: As the units purchase cost of ` does not change in both the computation, the same has not been considered to arrive at total cost of inventory for the purpose of savings. opy Rights Reserved To MASTER MINDS, IP_34e_osting _ Materials_ Assignment Solutions

2 Ph: /6 Quantity to be purchased at a time Problem No. 3 X8,50 X50 0%of ,5, ,50, units Problem No. 4 a) EOQ AO XI X(5,000 X) X350 5 X0. 5,578 units of component X b) Extra cost incurred by the company: Total cost (when order size is 5,000 units) Total ordering cost + Total carrying cost A Q XO + X XI Q 5,000 X 5,000 X`350 + X5 X% 5,000 `4,00+`46,800 `5,000 Total cost, when order size is 5,578 units 5,000 X 5,578 X350 + X5 X% 5,578 4,00+4,00 8,040 Extra cost incurred `5,000- `8,040 `,960 c) Minimum carrying cost, the company has to incur: Q X XI 5,578 X5 X% `4,00. Problem No. 5 Given that, Annual requirement (A),000 4,000 Packets arrying ost () 0 0% Rs. per packet p.a Ordering cost (S) Re..0 per order. AS a) Economic Order Quantity (EOQ) 4,000.0 b) Total of holding and carrying costs Associated cost AS 40 Packets X 4,000 X.0 X Rs.40 IP_34e_osting _ Materials_ Assignment Solutions

3 No. for A/WA & ME/E MASTER MINDS c) Monthly demand as given,000 Packets 000 onsumption per day Packets per day. 00 Existing stock will last for days. onclusion: Immediately, by the time the existing stock will get exhausted a new delivery will be obtained (It takes 3 days for New delivery). Therefore, the new order is to be placed immediately. alculation of EOQ:- Given, Annual Usage (A) 8,000 units Ordering cost per order(s) Rs.00 arrying cost per unit p.a () 400 X 0% Rs. 80 EOQ AS X8,000 X00 00 units. 80 alculation of total inventory cost p.a. at EOQ: Problem No. 6 Particulars Amount Purchase cost 8,000 X 400 3,00,000 Ordering cost A 8,000 XO X 00 8,000 Q 00 arrying cost Q 00 X Xi X 400 X 0% 8,000 alculation of total inventory cost p.a. with quantity discount: 3,6,000 Particulars Amount Purchase cost 8,000 X (400-4%) 30,7,000 Ordering cost A 8,000 XO X Q 4,000 arrying cost Q 4,000 X X384 X 0%,53,600 Total Rs.3,6,000 Quantity discount offered should not be accepted as it results in increase in total cost of inventory management by Rs. 0,000. Problem No. 7 (i) Given kg of M requires 3 kgs of X and quarterly demand 8000 units of M. Annual requirement of X 8000 X 4 X 3kgs kgs of X S ordering ost,000 per order arrying ost 0 X 5% 3 IP_34e_osting _ Materials_ Assignment Solutions 3

4 Ph: /6 EOQ (0)(96000) 8000 units. 3 Associated cost (96000)X0X Raw Material ost X 0 per kg 9,0,000 Total ost 9,44, (ii) If ompany accepts discount then order size 4000 units 4orders Then purchase price 70 % 9.6 arrying cost 9.6 X 5%.94 Ordering ost 4 orders X arrying ost 4000 X X.94 35,80 Raw Material ost 96,000 kgs X 9.6 per kg 8,8,600 Total ost at Discount 9,0,880 Discount should be accepted by the company as it results in savings of (9,44,000-9,0,880) 3,0 Problem No. 8 A 5,000 tonnes S Rs.,00 I 0% P Rs.,500 0,500X 300 Statement showing calculation of total cost at different order sizes: Order size No.of orders Ordering cost p.a arrying cost p.a Materials coat p.a Total cost(m+.+o.) p.a ,000 48,000 60,00,000 60,63, ,000 59,000 59,00,000 59,7,000, ,000,6,000 58,00,000 59,,000, ,000,8,000 57,00,000 59,3,000 3,000.67,004 3,36,000 56,00,000 59,38,000 Therefore Economical purchase level,000 tonnes (least cost) Note: a) Number of orders A EOQ Ordering cost no. of orders X cost per order arrying cost Order size X Price X %of. Material cost Annual demand X price per tone IP_34e_osting _ Materials_ Assignment Solutions 4

5 No. for A/WA & ME/E MASTER MINDS b) EOQ, when price is Rs.,500 EOQ AS Rs.00 Associated cost AS Rs.60,000. Problem No. 9 Working Notes:. EOQ without discount AS EOQ X50Units X`0 `4, units opy Rights Reserved To MASTER MINDS,. Prices with discount for different order size 5% Discount 30 5% ` % Discount 30 0% ` 7.00 % Discount 30 % ` 6.40 Statement of omputing Total cost at various order sizes Orders size (units) No. of Orders in a year Ordering ost arrying cost of average inventory Purchase cost Total cost () () (3) (4) (5) (3+4+5) (6) 50 50Units 5 50Units 7,5 7,35 (5 orders `0) X 4 (50 `8.50) 50Units 50 Units.5 50 Units 6,750 7,000 (.5 oders `0) 00 X 4 (50 `7) Units 5 50 Units 40 5Units 6,750 7,040 ( oders `0) 50 X 4 (50 `7) 5 Units 00 50Units.5* 5 00Units 6,600 7,05 ( X 4 (50 `6.4) 00Units oders `0) Units 0 50Units 6,600 7,0 (oder `0) 500 X 4 (50 `6.4) 50 Units Optimal order quantity units Minimum total cost of inventory and purchasing cost ` 7,000. Note: Theoretically it may be.5 orders, (50 ), however practically 3 orders are required. Therefore ordering cost would be ` 60 (3 0) and total cost ` 7,00 ( ). (* Theoretically orders may be in fraction but in practicality orders shall be in a whole number.) IP_34e_osting _ Materials_ Assignment Solutions 5

6 Ph: /6 Problem No. 0 Working notes:. Annual demand (30,000 units per quarter 4 quarters),0,000 units. Raw material required for,0,000 units (,0,000 units.5 kg.),80,000 kg. X,80,000 kgs. X, EOQ 3,46 kgs.(appx) 4. Total cost of procurement and storage when the order size is equal to EOQ or 3,46 kg. No. of orders (,80,000 kg. 3,46 kg.) 3.4 times or 4 times Ordering cost (4 orders `,000) ` 4,000 arrying cost (½ 3,46 kg. ` ) ` 3,46 Total cost ` 7,46 (i) Re-order point Safety stock + Lead time consumption,80,000 kg. 8,000kg. + X4 days 360 days 8,000 kg. +,000 kg. 0,000 kg. (ii) Statement showing the total cost of procurement and storage of raw materials (after considering the discount) Order size No. of orders Total cost of procurement Average stock Total cost of storage of raw materials Discount Total ost Kg. Kg. () () (3)() `,000 (4)½ () (5)(4) ` (6) (7)[(3)+(5) (6)],80,000,000 90,000,80,000 3,000,49,000 90,000,000 45,000 90,000 0,000 7,000 45, ,000,500 45,000-49,000 30, ,000 5,000 30,000-36,000 (iii) Number of orders which the company should place to minimize the costs after taking EOQ also into consideration is 4 orders. Total cost of procurement and storage in this case comes to ` 7,46 (please refer working note-4 above), which is minimum. Problem No. A Annual usage S Ordering cost per order arrying cost per unit per annum,800 x,600 units Rs x m Rs..40 a) E.O.Q. AS x,600 x units b) alculation of Reorder point: Given lead time days onsumption / day,800 units 30 days 60 units / day IP_34e_osting _ Materials_ Assignment Solutions 6

7 No. for A/WA & ME/E MASTER MINDS Lead time consumption days x 60 units 0 units Safety stock 50% (0 units) 50 0 x 60 units Reorder point lead time consumption + safety stock units c) alculation of economic purchase level No.of Orders Order Qty per month O. per month (No.of order x O. per order). per month (/ x avg inventory x..p.u.p.m) Discount Net ost (O.+.- Discount) 800 x x x x x x x Economical purchase level 450 Units Problem No. AO a) EOQ P Where, A annual consumption O ordering cost per order P carrying cost per unit per annum X,000 X X(4 /) opy Rights Reserved To MASTER MINDS,,00, 000,095.4 units say, units b) When should the order be placed i.e. reordering level Reordering level Safety stock + Normal lead time consumption,000 Reordering level +,000 X30 X , ,500 units c) What should be the inventory level immediately before the material ordered is received i.e. safety stock Safety stock,000 X30 360,000 units IP_34e_osting _ Materials_ Assignment Solutions 7

8 Ph: /6 Given Problem No. 3 A B Max usage (weekly) Average Usage Minimum Usage 5 5 R.O.Q Lead time Maximum Minimum A B Average Minimum + Maximum 5 3 a) R.O.L Maximum usage X Maximum Lead time (A) 75 X (B) 75 X b) Minimum Stock level R.O.L (Average Usage X Average Lead Time) (A) 450 (50 X 5) 00 (B) 300 (50 X 3) 50 c) Maximum Stock Level R.O.L + R.O.Q (Minimum Usage X Minimum L.T) (A) (5 X 4) 650 (B) (5 X ) 750 Minimum Stock Level + Maximum Stock Level d) Average Stock level (A) (B) 450 Problem No. 4 (i) Economic Order Quantity (E.O.Q) X Annual requirement of 'Re x Xorderingcos tper order Annual carryingcostper unit per annum X 60,000units X800 0 X5% 9,60,000 8,000 units.5 (ii) Re-order Level Safety Stock + (Normal daily Usage Re-order period) 60,000units X0days 300days 600 +,000,600 units (iii) Maximum Stock Level E.O.Q (Re-order Quantity) + Safety Stock 8,000 units units 8,600 units IP_34e_osting _ Materials_ Assignment Solutions 8

9 No. for A/WA & ME/E MASTER MINDS (iv) Average Stock Level Minimum stock level + Re order Quantity 600 * + 8,000units 4,600 units Maximum stocklevel + Minimum stocklevel Average Stock Level 8,600units + 600units 4,600 units * Minimum Stock Level Re-order level (Normal daily usage Re-order period) 60,000units,600 X0days 300days,600, units OR Minimum Stock Level Safety Stock level 600 units Problem No. 5 a) Re-order Quantity Economic order Quantity -00kgs kg -00kg 0kg AS Economic order Quantity (EOQ) X700 kgx70 5X3. 76% kg A Annual consumption /purchase S Ordering ost per order arrying cost per unit per annum No. of units to be sold 0,000units (+) closing stock of Finished Goods Nil (-) o/p stock of Finished Goods 900 units Production Annual consumption (+) losing stock of RM Nil 9 units (-) o/ping stock of RM 0kg Annual Demand/purchase b) Maximum stock level : Reorder level + Reorder Quantity (Min consumption per day x min lead time) 560kg +0kg - (30kg x 4 days) 560kg-0kg 440kg 800kg (9xkg) 700 kg IP_34e_osting _ Materials_ Assignment Solutions 9

10 Ph: /6 Re order level Maximum onsumption per day x maximum lead time Annualconsumption + Kg No.of days 800kg + 0kg x8 days kgs 0 x 8days Max consumption per day Average onsumption 50kg Min. consumption 50 kg + 0kg 70 kg Min consumption + Max. consumption Min consumption +70 kg kg c) Minimum stock level: Reorder level (Average consumption per day x Average lead time) 560 kg (50kg x 6 days) 60kg d) Impact on the Profitability of the company by not ordering the EOQ Particulars When purchasing the ROQ when purchasing the EOQ Order Quantity 0kg kg No of orders a year A ROQ / EOQ orders 0 Ordering cost (No of orders x s) orders arrying cost (ROQ / EOQ) X X X X X 7. Associated cost (O.+.) Extra cost incurred due to not ordering EOQ Problem No. 6 Given that, Reorder Level (ROL) 64,000 units Reorder Quantity (ROQ) 40,000 units Minimum Stock 34,000 units Maximum Stock 94,000 units Average lead time.5 days Average lead time.5 days Max. Lead Time + Min.Lead Time.5 days opy Rights Reserved To MASTER MINDS, IP_34e_osting _ Materials_ Assignment Solutions 0

11 No. for A/WA & ME/E MASTER MINDS Maximum + Minimum 5 days Maximum Minimum 3 days (Given in the problem) Maximum 8 days Maximum lead time 4 days; Minimum lead time day Maximum Usage: Reorder level Maximum usage Maximum lead time 64,000 Maximum usage 4; 64,000 Maximum usage 6,000 units 4 Minimum Usage: Maximum level Reorder level + Reorder quantity (Minimum usage Minimum lead time) 94,000 64, ,000 (minimum usage ) Minimum usage,04,000 94,000 0,000 units Given that, Minimum Stock Level of A 4,000 units. Average Stock Level of A 9,000 units. Average level Minimum level + ROQ 9,000 4,000 + i) Economic order Quantity(EOQ) Problem No. 7 ROQ ROQ 5,000 Reorder Quantity 0,000 units AS Problem No. 8 X36,000X35, Litres ii) 0% of risk of being out of stock indicates 90% of having stock. which will take 4days lead time A Safety stock x (4 days- days) 360days 36, 000 xdays litres Reorder point Minimum stock level + (Average lead time x Average consumption) 00 + (x) 400 litres iii) At 5% risk of being out stock represent 95% chance of having stock Safety stock days 5 days - days 3 days opy Rights Reserved To MASTER MINDS, IP_34e_osting _ Materials_ Assignment Solutions

12 Ph: /6 A Total ordering cost No of orders x s EOQ 36, 000 X Rs,05,000 Total carrying cost of inventory (safety stock + Average inventory x carrying cost/pu/p.a) x3days + (0x ) 360 ( ) x 990x.7676% Rs x 900+0% 990 Problem No. 9 x 990 * x.7676% Material Turnover Ratio (In times) ost material consumed Average stock (In days) 365 days No.of times Particulars Material A Material B Material onsumed (Opening Stock + Purchases losing Stock) Material Turnover Ratio (In times) 8,000 0, ,000 6,000 56,000 units IP_34e_osting _ Materials_ Assignment Solutions 9, ,000,000 5,000 units 56,000 5,000 7 times.5 times 0,000 Material Turnover Ratio days 46 days (In days) 7.5 onclusion: Material A is fast moving item compared to Material B. Problem No. 0 i) alculation of purchase cost per kg of each Raw materials Particulars Mustard Soya bean olive Whole sale market: Purchase Price 5 36 (+) ST (+) Import Duty (+) Loading cost kg (+) un loading cost Rs kg Farmers: Purchase Price (+) ST (+) Import Duty (+) loading cost kg (+) un loading cost kg

13 No. for A/WA & ME/E MASTER MINDS ii) Statement showing EOQ of each material under Each option: Particulars Mustard Soyabean Olive Annual Requirement (A) 7,00,000kg (45000x5kgxMonths) 080,000kg 6000kg Whole Sale Market: Transportation cost 6000 Sorting / piling cost Order cost /order (S) Interest on cash credit.945(5.54x.5%) Warehouse rent aring cost/p.u/p.a EOQ Farmers: AS x x Transportation cost 5,000,000,000 Sorting / piling cost, Order cost /order (S) 6,00,800,000 Interest on cash credit.58(.64x.5%) Warehouse rent Rs Kg arrying cost/p.u/p.a (c) EOQ AS X700,000X ,945 iii) Statement showing Annul cost of R.M (Olive) Particulars Whole sale Market Farmers Annul Requirement(A) 6000Kg 6000kg Order Quantity (Q) A 0 No. of orders ( ) Q a. Total Ordering cost (No of orders x s) b. Total carrying cost (order Quantityx/ xc) c. purchase cost Total ost (a+b+c) Decision: It is best to purchase the olive from famer because of its lower cost IP_34e_osting _ Materials_ Assignment Solutions 3

14 Ph: /6 Problem No. Particulars A B Quantity Price Quantity Price Raw Material Price 0 per,00,000 3 kg,04,000 kg 0% - 0,000-0,400 -,0,000 -,4,400 Less: Normal Loss units 9,500,0,000 7,680,4,400 Add: Railway -,33 -,707 freight (W.N.) 9,500,,33 7,680,6,07 Less: % further deterioration 9,30,,33 7,56,6,07 W.N.: Railway freight Expenditure is divided on the basis of quantity of hemical A and B. i.e. in the Ratio of 0:8 33 and 707 ost per kg of chemical A & B ost Quantity,,33 and 930,6,07.04 and Problem No. Statement showing Stores Ledger (FFO) Date Particulars Receipts Issues Balance Qty R.P.U Amt Qty R.P.U Amt Qty R.P.U Amt -9-0 Opening Stock Issues Receipts from B &.o Returns to B &.o Issues Receipts from M&.o Issues Returns from 8 36 M & o Shortages Value of closing stock under FIFO Method (5 units) Rs Value of Raw material consumed under FIFO Method (45units) Rs IP_34e_osting _ Materials_ Assignment Solutions 4

15 No. for A/WA & ME/E MASTER MINDS Treatment of shortage: Assuming it as a normal loss, treated as issues. Note : Returns to B & o. is to be recorded at the price at which the material was purchased. Note : Returns to supplier Issues (purchase price) Returns from production Dept. to stores Dept. Receipts (Issue price) Note 3: Returns from production Dept Note 4: Transfer from one job to another job to be ignored as it is a transaction taken place only in production department. Note 5: Transfer from Dept. A to Dept. B is to be ignored. Assumptions: opy Rights Reserved To MASTER MINDS,. Returns were made out of the issues in the month of August.. The purchase price of materials from M & o. is Rs.9 per unit. Date Problem No. 3 Stores Ledger of AT Ltd. for the month of September, 0 (FIFO Method) GRN No. MRR No. Qty. Units REEIPT ISSUE BALANE Rate Amount Requi sition No. Qty. Units Rate Amount Qty. Units Rate Amount Nil Shorta ge Working Notes:. The material received as replacement from vendor is treated as fresh supply. IP_34e_osting _ Materials_ Assignment Solutions 5

16 Ph: /6 In the absence of information the price of the material received from within on 0-9- has been taken as the price of the earlier issue made on In FIFO method physical flow of the material is irrelevant for pricing the issues. 3. The issue of material on 6-9- is made out of the material received from within. 4. The entries for transfer of material from one job and department to other on -9- and 9-9- are book entries for adjusting the cost of respective jobs and as such they have not been shown in the stores ledger account. 5. The material found short as a result of stock taking has been written off. Date Jan. Jan 0 Jan Jan 3 Date Jan. Jan 0 Jan Jan 3 Date Jan. Particulars Purchase Purchase Issue (Job w/6) Issue (JobW7) Particulars Purchase Purchase Issue (Job W6) Issue (JobW7) Particulars Purchase Problem No. 4 Stores ledger [FIFO] Receipts Issues Balance Units Rate Amount Units Rate Amount Units Rate Amount Stores ledger [LIFO] Receipts Issues Balance Units Rate Amount Units Rate Amount Units Rate Amount Stores ledger [Weighted average Method] Receipts Issues Balance Units Rate Amount Units Rate Amount Units Rate Amount Jan 0 Purchase Jan Issue (Job W6) Jan 3 Issue (JobW7) Statement showing value of job W 6, 7 & closing stock Particulars FIFO LIFO Weighted average Material for job 6 Job 7 losing sheet onclusion: a) In case of Rising Prices use of FIFO give rise to high profits & LIFO Method will give low Profits IP_34e_osting _ Materials_ Assignment Solutions 6

17 No. for A/WA & ME/E MASTER MINDS b) In case of weighted average there is no significant adverse (or) favorable effect on the cost material as well as an profits c) Hence weighted Average method is Preferred over FIFO & LIFO Methods Problem No. 5 Store Ledger of Aditya Ltd. (Weighted Average Method) Date Receipts Issues Balance of Stock Feb. Qty (kg.) Rate Amount Qty (kg.) Rate Amount Qty (kg.) Rate Amount , ,70, ,63, ,06, , ,0, , ,6, , ,06,75, ,0, ,8, , ,9,63 5, ,64, , ,93, ,00 3, ,6, , ,93,33, ,33, * ,6, ,48,688 * 80 kgs. is abnormal loss, hence it will be transferred to osting Profit & Loss A/c. Problem No. 6 a) Total purchases over a fen rod of 6 months 500 units (Jan to June) Total issues over a period of 6 month 300 units losing stock in June month ( ) 00 units Last month (June) period of 600units & issue in the same month is 400units. It means entire closing stocks on June month (00 units) are out of June month purchase. It means that there is no opening stock a June month i) Hence No Matter which method of pricing issue is used, will result the same value of closing stock. ii) Therefore argument of chief Accountant is tenable b) LIFO Method: i) Under this method, the cost of materials issued will be either nearer (or) will reflect the current market price. ii) The use of the method during the period of rising prices does not reflect undue high profit in the income statement, as it was under the FIFO (OR) Average method. iii) In the case of falling prices, profit tends to rise due to lower material cost, yet the finished goods appear to be more competitive and are at market price. iv) During the period of Inflation, LIFO will tend to show the correct profit & thus, avoid paying undue Taxes to some extent. opy Rights Reserved To MASTER MINDS, IP_34e_osting _ Materials_ Assignment Solutions 7

18 Ph: /6 Problem No. 7 lassification of the items of inventory as per AB analysis. 5 number of varieties of inventory items should be classified as A category items because of the following reasons: a) onstitute 0.375% of total number of varieties of inventory handled by stores of factory, which is minimum as per given classification in the table. b) 50% of total use value of inventory holding (average) which is maximum according to the given table. c) Highest in consumption about 85% of inventory usage (in end-product).. 0 number of varieties of inventory items should be classified as B category items because of the following reasons : a) onstitute.750% of total number of varieties of inventory items handled by stores of factory. b) Requires moderate investment of about 30% of total use value of inventory holding (average). c) Moderate in consumption about 0% of inventory usage (in end product). 3. 3,875 number of varieties of inventory items should be classified as category items because of the following reasons: a) onstitute % of total varieties of inventory items handled by stores of factory. b) Requires about 0% of total use value of inventory holding (average). c) Minimum inventory consumption i.e. about 5% of inventory usage (in end-product). THE END opy Rights Reserved To MASTER MINDS, IP_34e_osting _ Materials_ Assignment Solutions 8