Sahas Institute : - 11-12 Comm / FY – SY – TY B.

com /CA & CS Page |1

11th 12th (Eng. Med)

F.Y S.Y. T.Y. B.COM
C.A. & C.S ( All levels )
E-107, Vrundavan Township, Harni Road, Near Sangam, Vadodara. M : 99989 84152, 82384 48020

FF 9 Sharnam Comples , Near Crystal School , Opp, Bahurani Restaurant Near Parivar Char Rasta

S.Y.B.Com [ Sem 3 ] -: Cost Accounting [Cost] :- Unit 1

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Chapter 1. INTRODUCTION

Topic 1. Define ‘Cost Accounting’ & ‘Costing’. [Nov.-16]

M = 82384 48020 , 99989 84152
# Costing :- It is the Technique and process of ascertaining cost.
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# Technique :- It refers to analyzing and presenting cost to management
from planning, cost control and decision making.
:- It refers to the body of principles and rules which are used for ascertaining the cost of manufacturing a
product or the cost of rendering a service.
:- Examples : Absorption costing, Marginal costing, Standard costing, etc.
# Process :- It refers to the allocation, apportionment and absorption of costs by cost units.
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# Cost Accounting :-
:- It refers to the process of accounting for cost.
:- It Begins with = analyzing, classifying, recording and allocating the expenditure
for determining cost of a product.
:- It Ends with = preparation of periodical statements and reports for management
for planning, cost control and decision making.
:- It refers to the formal mechanism or a systematic procedure by means of which
cost of products or services are computed.
# CIMA defines Cost Accounting as "The establishment of budgets, standard costs and
actual costs of operations, processes, activities or products; and the analysis of variances,
profitability or the social use of funds".
# Cost Organization and its Relationship with other Departments :- [ Just For Knowledge ]
:- In the Organizational chart, the cost department occupies a very important position.
The cost department is responsible
(a) For keeping records connected with material, labour and expenses.
(b) For analyzing all costs of manufacturing, marketing and administration, and
(c) For issuing control reports and data for decision making to the executives, department heads,
section heads and foremen.
:- When management is provided with useful reports,
they assist in controlling and improving cost and operations.
:- Such information data are again, used for making new decisions.
:- The effectiveness of the control of cost depends upon proper communication
through control reposts form the cost accountant to the various levels of operating management.
:- Accounting and control reports are directed to these levels of management,
i.e. top management, middle management and lower level or shop floor level of management.
:- Each management level requires data for deciding and solving various problems.

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:- The cost accountant must devise a cost system into which,

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data are marshaled to fit the numerous problems confronting management.

:- Therefore the chart of accounts, which is the accountant's means of classifying costs and
expenses, must be closely associated with the organization chart showing principal management
position
with the line of delegation of authority responsibility and accountability.
:- Thus, an organization chart is essential to the development of a cost system.
:- Analysis of costs and preparation of reports are greatly facilitated by proper division of functions
generally listed under cost department.
:- Proper co-ordination is also necessary with other functions closely allied with cost accounting,
such as budget and data processing.
:- These functions should come under the supervision of the finance chief
unless they report to the chief of operation directly for other reasons.
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Topic 2. Relationship Of Cost Department With Other Department Just

Read
:- The cost department is intimately connected with the other departments in the organization.
Their relationship can be briefly established as follows :-

[A] Manufacturing departments :-

Manufacturing departments = control the scheduling, manufacturing and inspection of each job or
processed products to their finished stage in terms of efficiency norms established.
:- Costs incurred at each stage are measured and compared with the norms.

[B] Production planning, research and design department :-

Production planning, research and design department involve cost department for cost estimates
needed for each type of material, labour and machine process before a decision can be reached in
accepting or rejecting a design.

[C] Personnel department :-

Personnel department is interested in maintaining employee cost up - to - date.

:- The wage rate and methods of remuneration agreed with the employee
form the basis for computing payroll.
:- Cost department provides all data.
M = 82384 48020 , 99989 84152
[D] Marketing department :-
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Marketing department needs a good product at a competitive price.
:- While cost cannot determined price, it can influence fixation of price.
:- Besides, accurate cost data help sales manager distinguished profitable with non profitable products and
compare cost of marketing against sales volume.
[E] Public relation department :-
Public relation department establishes good relations with the public in general and customers,
creditors, shareholders, and employees in particular.
The cost department provides information concerning price, cost etc.
[F] Legal department :-

Legal department finds cost department helpful in keeping many affairs of the company in
conformity with the law, specially excise, customs, sales tax, and other legislation regarding maintenance of
accounts and cost records.
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[G] The Finance department :-

The finance department relies on the cost department for accounting valuation of inventory,
cash flow statements.
:- C.A.S. data for banks, etc. Where finance department is composed of general accounting and cost
accounting besides taxation and funds management departments, it is usual consider cost accounting
department providing unit cost of goods manufactured and sold to general accounting department.
The organization chart of a finance department usually takes the following form. Download

Director or Vice President Finance

General Manager General Manager

Finance and Accounting Management and
Accounting
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Manager Manager Manager Manager Manager Manager

General Banking Taxation Cost Budget EDP
Accounts Funds Accounts Accounts

CAS -1 COST ACCOUNTING STANDARD ON “CLASSIFICATION OF COST”

:- The Following is the COSTACCOUNTING STANDARD -1 (CAS -1) (Revised 2015) issued by the Council of
the Institute of Cost Accountants of India for determination of "CLASSIFICATION OF COST".
:- In this Standard, the standard portions have been set in bold italic type.
:- This standard should be read in the context of the background material which has been set in normal
type.

[1] INTRODUCTION :-
This standard deals with the principles of Classification of Cost for determining the cost of a product
or service.
[2] OBJECTIVE :-

The objective of this standard is to bring uniformity and consistency in the principles of
Classification of Cost for disclosure and presentation in the cost statements of a product or service.

[3] SCOPE :-
This standard shall be applied to cost statements, which require classification, presentation and
disclosure of cost including those requiring attestation.

[4] DEFINITIONS :-

The following terms are being used in this standard with the meaning specified.
# Abnormal Cost :- An unusual or a typical cost whose accurrence is usually irregular and unexpected
and / or due to some abnormal situation of the production or operation.
# Administrative Overheads :- Cost of all activities relating to general management and administration of
an entity.
:- Administrative overheads shall exclude production overhead, marketing overheads and interest and
finance charges.
:- Administrative overheads do not include administration cost relating to production, factory, works or
manufacturing.
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Topic – 2(a). COST

# Classification Of Cost :-
Classification of cost is the arrangement of items of costs in logical groups having regard to their
nature (subjective classification) and purpose (objective classification).
# Conversion Cost :-
Conversion cost is the production cost excluding the cost of direct materials.
# Cost [Jan.- 18] :-
Cost is a measurement, in monetary terms, of the amount of resources used for the purpose of
production of goods or rendering services.
:- Manufacturing of goods or rendering services involves consumption of resources.
:- The type of cost often referred to in the costing system depends on the purpose
for which cost is incurred.
:- For example, material cost is the price of materials consumed for manufacturing a product
or for rendering a service.
# Cost Centre : [Jan.-13, Jan.-18] :-
Any unit of an entity selected with a view to accumulating all cost under that unit.
:- The unit can be division, department, section, group of plant and machinery, group of employees or
combination of several units.
:- Cost Centre is the logical unit for accumulation of cost.
:- Cost Centre may be of two types personal and impersonal cost centers.
:- Personal cost center consists of a person or a group of persons.
:- Cost centers which are not personal cost centers are impersonal cost centers.
:- Cost centers, may also be classified into broad types i.e. Operating Cost Centers and Support - Service
Cost Centers.
:- Operating Cost Centers are those which are in the chain of operations like machine shop, welding shop,
assembly shop, operation theatre, call center and so on.
:- Support-service Cost centers are for rendering services to operating cost center like power house,
maintenance, stores, help desk, transport for call center staff and so on.
# Cost Object :-
An activity, contract, cost center, customer, process, product, project, service or any other object
for which costs are ascertained.
# Cost of Production :-
Cost of production of a product or a service consists of cost of materials consumed, direct employee
cost, direct expenses, production overheads, quality control costs, packing costs, research and
development costs and administrative overheads relating to production.
:- Cost of production of a service means cost of the service rendered.
:- To arrive at cost of production of goods, including those dispatched for captive consumption,
adjustment for stock of work-in-process, finished goods, recoveries for sales of scrap, wastage and the like,
shall be made.
# Cost of Transportation :-
Cost of Transportation comprises of the cost of freight, cartage, transit insurance and cost of
operating fleet and other incidental charges whether incurred internally or paid to an outside agency for
transportation of goods but does not include detention and demurrage charges.
Cost of transportation is classified as inward transportation cost and outward transportation cost.
# Cost Unit : [Oct.-13] :-
Cost Unit is a form of measurement of volume of production of a product or a service. Cost Unit is
generally adopted on the basis of convenience and practice in the industry concerned.
- Examples :- Power - MW; Cement - MT; Automobile - Number; Transportation - Tonne -Kilometre

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# Development Cost :- Development cost is the cost for application of research finding or other
knowledge to a plan or design for the production of new or substantially improved materials, devices,
product, processes, system or services before the start of commercial production or use.
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# Direct Employee Cost :- Employee costs, which can be attributed to a cost object
in an economically feasible way.
# Direct Expenses :- Expenses relating to manufacture of a product or rendering a service,
which can be identified or linked with the cost object
other than direct material cost and direct employee cost.
:- Examples : Royalties charged on production; Job charges; Hire charges for use of specific
equipment for a specific job; Software services specifically required for a job;
# Direct Materials :-
Materials, the costs of which can be attributed to a cost object in an economically feasible way.
# Distribution Overheads :-
Distribution overheads, also known as distribution costs, are the costs incurred in handling a
product or service from the time it is ready for dispatch or delivery until it reaches the ultimate consumer
including the units receiving the product or service in an inter-unit transfer.
:- The cost of any non-manufacturing operation such as packing, repacking and labelling at an
intermediate storage location will be part of distribution cost.
:- Examples : Secondary packing; Outward transportation cost; Water housing cost; Cost of
delivering the products to customers; Clearing and forwarding charges; Cost of mending or replacing
packing materials at distribution point.
# Employee Cost :-
Benefits paid or payable for the services rendered by employees
(including temporary, part time and contract employees) of an entity.
-: Explanation :-
(1) Contract employees include employees engaged by the employer on contract basis,
either directly or through a contractor but does not include employees of any contractor
engaged in the entity for a contractual job.
(2) Compensation paid to employees for the past period on account of any dispute / court orders
in the current period shall form part of employee cost, but not a part of production cost.
(3) Short provisions of prior period employee cost in current period shall form part of the employee cost
in the current period, but not a part of production cost.
:- Employee cost includes payment made in cash or kind. Download
# Fixed Costs : [Jan.- 18] :-
:- Fixed costs are costs which do not vary with the change in the volume of activity.
:- Fixed indirect costs are termed fixed overheads.
# Indirect Employee Cost :-
Employee cost, which cannot be directly attributed to a particular cost object.
# Indirect Expenses :- Expenses, which cannot be directly attributed to a particular cost object.
# Indirect Materials :-
Materials, the costs of which cannot be directly attributed to a particular cost object.
# Marketing overheads :-
Marketing overheads comprise of selling overheads and distribution overheads.
# Material Cost :-
The cost of material used for the purpose of production of a product or rendering a service.
# Normal capacity :-
:- Normal Capacity is the production achieved or achievable on an average over a number of
periods
or seasons under normal circumstances taking into account the loss of capacity resulting
from planned maintenance.
:- The above definition is also applicable for normal capacity in relation to a service being rendered.
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# Overheads :- Overheads comprise costs of indirect materials, indirect employees and indirect
expenses.
# Packing Material Cost :-
The cost of material of any nature used for the purpose of packing of a product.
:- Packing material can be classified into primary packing material and secondary packing material.
:- Primary packing material is essential to hold and preserve the product for its use Download
by the customer and secondary packing material enables
to store, transport, inform the customer, promote and
otherwise make the product marketable.
# Prime cost :-
Prime cost is the aggregate of direct material cost, direct Employee cost and direct expenses.
# Production Overheads :- Indirect costs involved in the production of a product or in rendering
service. :- The terms Production Overheads, Factory Overheads, Works Overheads and
Manufacturing Overheads denote the same meaning.
:- Production overheads include administration costs
relating to production, factory, works or manufacturing.
# Research Cost :- Research cost is the cost of original and planned investigation undertaken with the
prospect of gaining new scientific or technical knowledge and understanding.
# Selling Overheads :- Selling overheads are the expenses related to sale of products or services
and include all indirect expenses incurred in selling the products or services.
:- Selling overheads are also known as selling costs.
# Semi Variable Costs :- Semi Variable Costs are the costs that contain both fixed and variable
elements. :- They partly change with the change in the level of activity.
# Support Service (Auxiliary Service) Cost Centre :-
:- The cost centre which primarily provides auxiliary services across the entity.
:- The cost centre which provides services to production, operation or other service cost centre
but not directly engaged in manufacturing process or operation or
in rendering a service is a support-service cost centre.
:- A support service cost centre renders services to other cost centre's/other units and in some
cases to outside parties.
Examples : Engineering, Workshop, Quality Control, Quality assurance, Designing, Laborator,
Help Desk; Transport for call centre staff
# Standard cost :-
:- A predetermined cost of a product or service based on technical specifications
and efficient operation conditions.
:- Standard costs are used as scale of reference to compare the actual cost
with the standard and take proper measure to control them.
# Variable Costs : [Jan.-13] :-
:- Variable costs are the cost which tends to directly vary with the volume of activity.
:- Variable indirect costs are termed as variable overheads.
99989 84152 , 82384 48020
[5] PRINCIPLES OF CLASSIFICATION OF COSTS :-

:- Costs shall be classified by the process of grouping the components of cost

under a common designation on the basis of similarities of nature, attributes or relations.
:- Items grouped together under common heads shall be further classified
according to their fundamental differences.
:- It is the process of identification of each item and the systematic placement of like items
together according to their common features.
:- The same costs may appear in several different classifications depending on the purpose of classification.
:- Cost is classified normally in terms of managerial objective.
:- Its presentation normally requires sub-classification.

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:- Such sub-classification may be according to nature of the cost elements,

functional lines, areas of responsibility, or some other useful break-up.
:- The appropriate sub-classification depends upon the uses to be made of the cost report.
:- Cost may be classified with reference to the nature of expense,
it is traceability to a cost object (direct-indirect) its relation on functions/activities,
its behaviour (fixed, semi-variable or variable) and its relationship to production process.
:- Scheme of classification shall be such that every item of cost is classified.
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Topic 3. Classification Of Cost [Dec. -14, Sep. -15, Nov. -16, May -18]

Classification of Costs

(A) (B) (C) (D) (E)

By nature of By nature of By By nature of By nature of
Expenses traceability to Function Behaviour production or
a Cost object Operation process

[A] By Nature of Expenses :- M = 82384 48020 , 99989 84152

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:- Items of costs differ on the basis of their nature.
:- Costs shall be gathered together in their nature grouping such as material, employee and expenses.
:- The elements of cost can be classified in the following three categories:
(1) Material (2) Employee (3) Expenses
(1) Material Cost :-
Material Costs are cost of materials used for the purpose of production of a product or
rendering of a service, net of trade discounts, rebates, taxes and duties refundable that can be quantified
with reasonable accuracy.
(2) Employee Cost :-
Employee Costs are consideration, including benefits paid or payable to employees, permanent or
temporary, for the purpose of production of a product or rendering of a service.
:- It is the aggregate of all kinds of consideration paid and payable for the services rendered by
employees of an entity (including temporary, part time and contract employees).
:- Consideration include wages, salaries, and other payments, including benefits, as applicable.
(3) Expenses :-
Expenses are costs other than material cost and employee cost for the purpose of production of a
product or rendering of a service.
Examples :- Cost of utilities; Payment for bought out services; Job processing charges.

[B] By Nature of Traceability to a Cost Object :-

:- Classification shall be on the basis of method of assigning cost to a cost object. Lowest Fees
:- If a cost can be assigned to a cost object in an economically feasible way, &
it shall be termed as direct to that cost object. Highest
:- A cost that cannot be assigned directly shall be indirect cost.
(1) Direct Material Costs :- Value Smart
Direct Material Costs are the cost of materials, Education
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which can be assigned to a cost object in an economically feasible way.
:- Raw materials consumed for production of a product or rendering of a service,

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which are identifiable to the product or service from the direct material cost.
:- Direct material cost includes cost of procurement, freight inward, taxes & duties
and insurance directly attributable to the acquisition of the material.
:- Trade discounts, rebates, duty drawbacks, refunds of duties/taxes and other similar items are deducted
in determining the costs of direct material.
(2) Direct Employee Cost :-
:- Direct Employee Cost are employee costs,
which can be assigned to a cost object in an economically feasible way.
:- Example : The cost of wages of those workers who are readily identified or linked with a cost
centre or cost object, including the fringe benefits like provident fund contribution, gratuity, ESI, overtime,
incentive, bonus, ex-gratia, leave encashment and wages for holidays and idle time.
(3) Direct Expenses : [Oct.-12; Oct.-13] :-
:- Direct Expenses are expenses, which can be assigned to a cost object.
:- Examples : Expenses for special moulds required in a particular cost centre; Hiring charges for
tools and equipment’s for a cost centre; Royalties in connection to a product; Job processing charges
(4) Indirect Material Costs: [Jan.-18] :-
:- Indirect Material Costs are cost of materials, which cannot be directly assigned to a particular cost
object in an economically feasible way.
:- Examples : Consumable spares and parts; Lubricants ;
Cost of computer stationary for administrative function.
(5) Indirect Employee costs :-
Indirect Employee costs are employee costs, which cannot be directly assigned
to a particular cost object in an economically feasible way.
:- Examples : Salaries of security staff; Operating manager's salary
(6) Indirect Expenses :-
Indirect Expenses are expenses, which cannot be directly assigned to a particular cost object in an
economically feasible way.
:- Example : Insurance; Rates and Taxes
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[C] By Function [Dec.-15] :-
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:- Costs shall be classified according to major functions viz :
Production; Project; Administration; Selling; Distribution; Research; Development;
(1) Production Cost :-
The cost of the set of operations commencing with supply of materials, labour and services
and ending with the primary packing of product.
Thus it is equal to the total of Direct Materials, Direct Labour, Direct Expenses and Production
Overheads.
In a wider sense, it includes all Direct Costs and all Indirect Costs related to the production
(including Research and Development Cost apportioned, if any)
(2) Administration Cost :-
The cost of formulating the policy, directing the organisation and controlling the operations of the
undertaking, of general management and administrative services, which is not directly related to
Production, Selling, Distribution, Research or Development activity or function.
Examples :- Office Rent, Accounts and Secretarial Department Expenses, Audit and Legal Expenses,
Directors Remuneration, etc.
(3) Selling Cost :-
The cost of seeking to create and stimulate demand and of securing orders.
:- These are also called Marketing Costs.
Examples :- Market Research, Advertisement, Salaries, Commission and Travel Expenses of
Salesmen, Show-room Expenses, Cost of Samples, etc.
(4) Distribution Cost :-
The cost of the sequence of operations which begins with making the packed product available

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for dispatch and ends with making the reconditioned returned empty package,
if any, available for re-use.
:- Examples : Distribution Packing (secondary packing), Carriage Outwards, Maintenance of Delivery
Vans, Cost of transporting articles to central or local storage, cost of moving articles to and from
prospective customers (as in Sale or Return), cost of warehousing saleable products, etc.
(5) Research Cost :-
Cost of development of new product and manufacturing process, improvement of existing products,
process and equipment, finding new uses for known products, solving technical problems arising in
manufacture & application of products, etc.
(6) Development Cost :-
The cost of the process which begins with the implementation of the decision to produce a new or
improved product, or to employ a new or improved method and ends with commencement of formal
production of that product or by that method, i.e. cost incurred for commercialization/implementation of
research finding.
(7) Pre-Production Cost :-
The part of Development Cost incurred in making a trial production run prior to formal production.
(8) Conversion Cost :-
The total of Direct Wages, Direct Expenses and Production Overhead, Cost of converting Raw
Materials to the finished stage or converting a material from one stage of production to the other.

[D] By Nature Of Behaviour [Jan.-14; March -16 & 17; May -18] :-

:- Costs shall be classified based on behaviour in response to the changes in the activity levels such as,
fixed cost, variable cost and semi-variable cost.
(1) Fixed Cost :- is the cost which does not vary with the change in the volume of activity in the :- short-
run. :- These costs are not affected by temporary fluctuation in activity of an enterprise.
:- These are also known as Period Costs.
Examples :- Salaries, Rent, Insurance, Audit Fees, Depreciation, etc.
(2) Variable Cost :- is the cost of elements which tends to directly vary with the volume of activity.
:- Variable Cost has two parts :- (a) Variable Direct Cost, & (b) Variable Indirect Costs.
:- Variable Indirect Costs are termed as Variable Overhead.
Examples :- Materials Consumed, Direct Labour, Sales Commission, Download
Utilities, Fireight, Packing, etc.
(3) Semi Variable Costs :- contain both fixed and variable elements.
:- They are partly affected by fluctuation in the level of activity.
Examples :- Factory Supervision, Maintenance, Power, Water, Telephone, etc.

[E] By Nature Of Production Or Operation Process [Oct.-14] :-

(1) Costs shall also be classified on the basis of nature of production or operation process.
(2) Batch Cost shall be the aggregate cost related to a cost unit
which consist of a group of similar articles or services which maintain its identity
throughout one or more stages of production or operation.
(3) Process cost shall be the cost of production or operation process
where goods are produced or services rendered from a sequence of continuous or repetitive
operations or processes during a period.
(4) Operation Cost shall be the cost a specific operation
involved in production of goods or rendering of services.
(5) Contract cost shall be the cost of a contract agreed upon between the contractee and the contractor.
(6) Joint costs are the costs of common resources used for producing
two or more products or rendering two or more services simultaneously.
11th 12th Comm (Eng Med)
LOWEST FEES = HIGHEST VALUE EDUCATION F.Y - S.Y. - T.Y - B.Com
( From Anywhere @ Anytime ) C.A & C.S [ All Levels ]
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# Presentation :-
(1) The cost items in the cost statement shall be presented on 'basis of relevant classification'.
(2) The classification of cost items shall be followed consistently from period to period.

# Disclosure :-
(1) Any change in classification of cost shall be made only if it is required by law
or for compliance with a Cost Accounting Standard
or such change would result in a more appropriate preparation
or presentation of cost statements of an entity.
(2) Any change in classification of cost which has a material effect
on the cost of the product shall be disclosed in the cost statements.
:- Where the effect of such change is not ascertainable wholly or partly,
the fact shall be indicated in the cost statement.
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S.Y.B.Com [ Sem 3 ] -: Cost Accounting [Cost] :- Unit 1
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Chapter 2. MATERIAL COST

Topic 1. Introduction :-
:- The basic object of cost accounting is to control the cost.
:

:- This can be achieved by keeping an effective control over each element of cost.
:- Out of the three elements of costs i.e. materials, labour and expenses,
the material element constitute the highest proportion of total cost.
:- Thus it is very essential to have proper control over materials.
:- The main purpose of material control is to ensure continuous supply of materials
in sufficient quantity as and when required and also to have optimum investment in material.
# The term material includes the following :-
(1) Raw Materials (2) Work in progress (3) Consumable Download
(4) Finished goods (5) Spare / Parts
:- Material control can be defined as
"a systematic control over purchasing, storing and consumption of material,
so as to maintain regular and timely supply of materials and at the same time,

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to avoid overstocking "

:- In order to run production cycle smoothly efforts should be made
to place the orders for the purchase of materials
at the right time, with the right source, of right quality, in right quantity and at right price.
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Topic 2. Objectives Of Material Control :-

:- The prime object of material control is to ensure availability of materials in sufficient quantity
as and when required and also to have optimum investment in material.
:- The investment in material should not be excess and inadequate (i.e. shortage / low).
:- The optimum working capital fund should be invested in purchase of material items.

# The following are the objectives of material control. :-

[1] Availability of Materials :-
The primary object of material control is to have continuous supply of materials
as and when required so that production may not be held up for want of material.
[2] Avoidance of Over - Stocking and Under - Stocking of materials :-
The materials should be stocked at optimum level
in view of operational requirements of the business.
:- This objective is increasingly important because
in under - stocking stock out problems is danger and in over stocking excess investment is also
danger.
:- Both are not advantageous to the firm or business.
[3] Optimum investment in materials :-
The investment in material should always be at optimum level.
:- The working capital fund invested in materials should not be in excess and inadequate.
:- The determination of maximum level and minimum levels of stocks are attempts
in avoiding over investment and under investment in material.
[4] Purchase of material at low price :- M = 82384 48020 , 99989 84152
The materials should be purchased at reasonably low price. Join Today For Smart Education
:- This helps in keeping cost of production at low price.
:- However, quality of the product should not be sacrificed at the cost of lower price.
[5] Economy of purchasing :-
A proper material control brings certain advantages and economies in purchasing also.
:- Every attempt has to be made to effect economy in purchasing through quality and
taking advantage of favorable market i.e. purchase of raw materials when prices are low.
[6] Centralize purchase of materials :-
The purchase of materials should be centralized to eliminate duplication in ordering of the
materials.
[7] Avoidance of wastage of materials :-
Proper storage of materials by the storekeeper and
handling of materials by the workers in production department reduce the wastage of
materials.
:- Wastage should be allowed up to a certain level known as normal wastage to avoid
any abnormal wastage (i.e. more than normal) Strict control over materials should be exercised.
:- Leakage, damage theft and spoilage of materials due to rust dust or dirt should be avoided at all stages.
[8] Increase in efficiency :-
If the right quality of materials is purchased at right time for the production purposes
the idle time can be avoided and efficiency of manufacturing department can also be increased.

Join the Best To be the Best

E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
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Quality Teaching + PURCHASE

Efficient Management = Best Result
PROCEDURE

PRODUCTION STORES INSPECTION

Material
DEPARTMENT ROOM DEPARTMENT
Inspection Note

Purchase Purchase
Requisition Requisition Goods Received Note
(Special Material) (Routine Material)
RECEIVING
PURCHASE
DEPARTMENT
DEPARTMENT

Material

PURCHASE
TENDER/ ORDER
QUOTATION

=================================================================

Topic 3. Which Documents are required in respect of receipts

& issues of Stock :-

:- For stores accounting, two main records viz, Bin Cards and Stores ledger are generally maintained.
:- In these records all receipts, issues and balance of materials are written.
:- The Bin Card is maintained by Store keeper and Stores Ledger is maintained by Costing Department.

[1] Bin Card :- [Coll. – Sep.-15, Jan-18]

:- Bin card is a card, which shows the physical movement of the stock,
It shows the quantity of material received, issued and balance at any time.
:- The main purpose of Bin Card is to disclose at a glance
what quantity of a particular commodity is in his stock without having referring to the stores ledger
or ascertain the information by actual inspection of the goods. Download
:- It is also very useful at stock taking time.
:- It acts as counter check on the stores ledger.
# It is termed a “Bin Card” as it is generally hung on bins or racks.
[2] Stores Ledger :-
:- Stores Ledger is similar to Bin Card except that the latter contain only quantitative records
whereas Stores Ledger contains both quantitative and money values of stores items.
:- Entries in the stores ledger related to receipts are made on the basis of goods Received note (GRN)
and entries for issues are made on the basis of Material Requisition Note (MRN).
:- The Stores Ledger sheet are generally in loose form and are used for each class of materials.
:- The loose sheets are numbered serially and are initialed.
:- In some organization, stores ledger is maintained in bound volume so as to avoid the loss of loose leaves.
=================================================================

LOWEST FEES = HIGHEST VALUE EDUCATION

( From
E-107, Vrundavan township, Besides Anywhere
Tasty @sangam
Restaurant ,Near Anytime ) – 82384 48020 , 99989 84152
char rasta,
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Topic 4. Format of Issue Procedure :-

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Topic 5. (CAS – 6)
-: Cost Accounting Standard On Material Cost :-
:- The following is the cost Accounting Standard 6 (CAS 6)
issued by the Council of the Institute of Cost and Works Accountants of India on "Material Cost".
:- In this Standard, the standard portions have been set in bold italic type.
:- This standard should be read in the context of the background material, which has been set in normal
type.
INTRODUCTION :-
:- This standard deals with principles and methods of determining the Material Cost.
:- Material for the purpose of this standard includes
raw materials, process materials, additives, manufactured / bought out components, sub-
assemblies, accessories, semi finished goods, consumable stores, spares and other indirect
materials.
:- This standard does not deal with Packing Materials as a separate standard is being issued on the subject.
:- This standard deals with the principles and methods of classification,
measurement and assignment of material cost, for determination of the Cost of product or service,
and the presentation and disclosure in cost statements.
# The Standard deals with the following issues. :-
⇨ Principle of Valuation of receipts of materials.
⇨ Principle of Valuation of issue of materials.
⇨ Assignment of material cost to cost objects.

OBJECTIVE :-
:- The objective of this standard is to bring uniformity and consistency
in the principles and methods of determining the material cost with reasonable accuracy.

SCOPE :-
E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
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:- This standard should be applied to cost statements which require classification, measurement,
assignment, presentation and disclosure of material costs including those requiring attestation.

DEFINITIONS :-
# The following terms are being used in this standard with the meaning specified.
:-
❖ Abnormal Cost :-
:- An unusual or atypical cost whose occurrence is usually irregular and unexpected
and/or due to some abnormal situation of the production or operation.
❖ Administrative overheads :-
:- Expenses in the nature of indirect costs, incurred for general management of an organization.
❖ Cost Object :-
:- This includes a product, service, cost Centre, activity, sub-activity, project, contract,
customer or distribution channel or any other unit in relation to which costs are ascertained.
❖ Defectives :-
:- End Product and/or intermediate product units that do not meet quality standards.
:- This may include reworks or rejects.
❖ Reworks :-
:- Defectives which can be brought up to the standards by putting in additional resources.
:- Rework includes repairs, reconditioning and refurbishing.
❖ Rejects :-
:- Defectives which cannot meet the quality standards even after putting in additional resources.
:- Rejects may be disposed off as waste or sold for salvage value or recycled in the production process.
❖ Imputed Costs :-
:- Hypothetical or national costs, not involving cash outlay,
computed only for the purpose of the decision making.

MATERIALS :-
# Direct Materials :-
Materials the costs of which can be attributed to a cost object in an economically feasible way.
# Indirect Materials :-
Materials, the costs of which cannot be directly attributed to a particular cost object.

# Material Cost :-
The cost of material of any nature used for the purpose of production of a product or a service.
# Production overheads :-
Indirect costs involved in the production process or in rendering service.
:- The terms Production Overheads, Factory Overheads, Works Overheads and
Manufacturing Overheads denote the same meaning and are used interchangeably.
# Scrap :-
Discarded material having some value in few cases and
which is usually either disposed of without further treatment (other than reclamation and handling) or
reintroduced into the production process in place of raw material.
# Standard Cost :-
A predetermined norm applied as a scale of reference for assessing actual cost,
whether these are more or less.
:- The standard cost serves as a basis of cost control and as a measure of productive efficiency
when ultimately posed with an actual cost.
:- It provides management with a medium by which the effectiveness of current results is measured
and responsibility for deviation is placed.
:- Standard costs are used to compare the actual costs with the standard cost
E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
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with a view to determine the variances,

if any, and analyses the causes of variances and take proper measure to control them.

LOWEST:- FEES = HIGHEST VALUE EDUCATION

WASTE & SPOILAGE
# Waste :-
Material loss building production or storage due to various factors
such as evaporation, chemical reaction, contamination, unrecoverable residue,
shrinkage, etc. and discarded material which may or may not have value.
# Spoilage :-
Production that does not meet with dimensional or quality standards
in such a way that it cannot be rectified economically
and is sold for a disposal value.
:- Net Spoilage is the difference
between costs accumulated up to the point of rejection and the salvage value.
=================================================================

Topic 6. Principles Of Measurement :-

# Principle of valuation of receipts of materials :-
:- The material receipt should be valued at purchase price including
duties and taxes, freight inwards, insurance, and other expenditure directly attributable
to procurement (net of trade discounts, rebates, taxes and duties refundable or to be credited
by the taxing authorities) that can be quantified with reasonable accuracy at the time of acquisition.
:- Examples of taxes and duties to be deducted from cost are cenvat credits,
credit for countervailing customs duty, sales tax set off/vat credits and other similar items
of credit recovered/recoverable.
:- Finance costs incurred in connection with the acquisition of materials shall not form part Of material
cost.
:- Self manufactured materials shall be valued including direct material cost, direct employee cost,
direct expenses, factory overheads, share of administrative overheads relating to production
but excluding share of other administrative overheads, finance cost and marketing overheads.
:- In case of captive consumption, the valuation shall be in accordance with Cost Accounting Standard 4.
:- Spares which are specific to an item of equipment shall not be taken to inventory,
but shall be capitalized with the cost of the specific equipment.
:- Cost of capital spares and/or insurance spares, whether procured with the equipment or subsequently,
shall be amortised over a period, not exceeding the useful life of the equipment.
:- Normal loss or spoilage of material prior or reaching the factory or at places
where the services are provided shall be absorbed in the cost of balance materials
net of amounts recoverable from suppliers, insures, carriers or recoveries form disposal.
:- Losses due to shrinkage or evaporation and gain due to elongation or absorption of moisture etc.,
before the material is received shall be absorbed in material cost to the extent they are normal,
with corresponding adjustment in the quantity.
:- The forex component of improted material cost shall be converted
at the rate on the date of the transaction. M = 82384 48020 , 99989 84152
:- Any subsequent change in the exchange rate till payment
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or otherwise shall not form part of the material cost.
⇨ Explanation :- The date on which a transaction (whether for goods or services) is recognised
in accounting in conformity with generally accepted accounting principles.
:- Any demurrage or detention charges, or penalty levied by transport
or other authorities shall not form part of the cost of materials.
:- Subsidy / Grant/ Incentive and any such payment received /receivable with respect to any material
shall be reduced from cost for ascertainment of the cost object to which such amounts are related.
:- Principle of valuation of issue of material

E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
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:- Issues shall be valued using appropriate assumptions on cost flow.

⇨ E.g. First in First out, Last in First out, Weighted Average Rate.
:- The method of valuation shall be followed on a consistent basis.
:- Where materials are accounted at standard cost,
the price variances related to materials shall be treated as part of material cost.
:- Any abnormal cost shall be excluded from the material cost.
:- Wherever, material costs include transportation costs,
determination of costs of transportation shall be govern med by CAS 5 - Cost Accounting Standard
on Determination of Average (Equalized) Cost of Transportation.
:- Material cost may include imputed costs not considered in financial accounts.
:- Such costs which are not recognized in financial accounts may be determined by imputing a cost
to the usage or by measuring the benefit from an alternate use of the resource.
:- Self manufactured components and sub-assemblies shall be valued including direct material cost,
direct employee Cost, direct expenses, factory overheads, share of administrative overheads
relating to production but excluding share of other administrative overheads,
finance cost and marketing overheads.
:- In case of captive consumption, the valuation shall be in accordance with Cost Accounting Standard 4.
:- The material cost of normal scrap / defectives
which are rejects shall be included in the material cost of goods manufactured.
:- The material cost of actual scrap / defectives, not exceeding the normal shall be adjusted
in the material cost of good production.
:- Material Cost of abnormal scrap / defectives shall not be included in material cost but
treated as loss after giving credit to the realisable value of such scrap / defectives.
======================================================

Topic 7. Assignment Of Costs :-

:- The basis of assignment of costs to the cost of product or service is dealt within this section.
❖ Assignment of costs - Materials
:- Assignment of material costs to cost objects :-
Material costs shall be directly traced to a Cost object to the extent it is economically feasible
and/or shall be assigned to the cost object on the basis of material quantity consumed or
similar identifiable measure and valued as per the principles laid under Paragraph 5.
:- Where the material costs are not directly traceable to the cost object,
these may be assigned on a suitable basis like technical estimates.
❖ Assignment of costs - Direct Expenses
:- Where a material is processed or part manufactured by a third party according to specifications provided
by the buyer, the processing/manufacturing charges payable to the third party shall be treated
as part of the material cost.
:- Wherever part of the manufacturing operations/activity is subcontracted,
the subcontract charges related to materials shall be treated as direct expenses
and assigned directly to the cost object.
❖ Assignment of costs - Indirect materials
:- The cost of indirect materials shall be assigned to the various Cost objects
based on a suitable basis such as actual usage or technical norms or a similar identifiable measure.
:- The cost of materials like catalysts, dies, tools, moulds, patterns etc,
which are relatable to production over a period of time shall be amortized over the production units
benefited by such cost.
:- The cost of indirect material with life exceeding one year
shall be included in cost over the useful like of the material.
===================================================

Topic 8. Presentation :-
E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
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# Cost Statements governed by this standard, shall present material costs as detailed below :-
:- Direct Materials shall be classified in the cost statement under suitable heads.
⇨ E.g. *Raw materials * Components * Semi finished goods
and * Sub Assemblies
:- Direct Materials shall be classified as Purchased - indigenous, imported and self manufactured.
:- Indirect Materials shall be classified in the cost statement under suitable heads.
:- Indirect materials may be grouped under major heads like
tools, stores and spares, machinery spares, jigs and fixtures, consumable stores, etc.,
if they are significant.
================================================

Topic 9. Disclosures :-
# The following information should be disclosed in the cost statements
dealing with determination of material cost.
:- Quantity and rates of major items of materials shall be disclosed.
:- Major items are defined as those who form 5% of cost of materials.
:- The basis of valuation of materials shall be disclosed.
:- Any change in the cost accounting principles and methods applied for the determination
of the material cost during the period covered by the cost statement
which has a material effect on the cost of the material shall be disclosed.
:- Where the effect of such change is not ascertainable wholly or partly, the fact shall be indicated.
:- Any abnormal cost excluded from the material cost shall be disclosed.
:- Any demurrage or detention charges, penalty levied by transport or other authorities excluded
from the material cost shall be disclosed.
:- Any Subsidy/Grant/Incentive or any such payment reduced from material cost shall be disclosed.
:- Cost of Material procured from related parties shall be disclosed.
:- Any cost imputed in arriving at the material cost shall be disclosed.
:- Disclosure shall be made only where significant, material and quantifiable.
:- Disclosures may be made in the body of the Cost Statement or as a footnote or as a separate schedule.
:- The Cost Accounting Standard on "MATERIAL COST"
issued by the Council of The Institute of Cost and Works Accountants of India shall be applicable
to all Cost Statements prepared on or after 1stApril, 2017.
=================================================================

Topic 10. Methods of Pricing of Issue :-

:- Materials are frequently purchased at different prices and
are issued to different production departments according to their needs.
:- At what price should the materials issued be charged to production department ?
:- If materials is purchased for a specific job, pricing of such issue does not create any problem.
:- The price paid for the purchase of such materials will be charged to that job.
But generally raw materials are purchased in anticipation and issued
whenever they are needed by the production departments .
:- The stock lying in the store consists of many purchases at different prices and when they are issued,
they create problems as to which price the materials should be charged to the job.

E 107 Vrundavant Township , JashRaj Complex ,

Besides Tasty Restaurant , Besides Crystal School
Near Sangam Cross Roads , Near Parivar Cross Roads ,
Karelibaug Waghodia Road

E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
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❖ METHOD OF PRICING OF ISSUES

Method of Issues

Actual Cost Average Cost Notional Cost Market price

Methods Methods Methods Methods

1) F.I.FO 1) SIMPLE AVG. 1) STANDARD PRICE 1) Replacement

2) L.I.FO 2) WEIGHTED AVG. METHOD Price Method
3) H.I.FO 3) PERIODIC SIMPLE AVG. 2) INFLATED PRICE 2) Net Realizable
4) N.I.FO 4) PERIODIC WEIGHTED AVG. METHOD Price Method
5) BASE STOCK
6) SPECIFIC PRICE
=================================================================

METHOD – 1 : FIFO METHOD

Topic 11. What is FIFO Method ? :- M = 82384 48020 , 99989 84152

-: Advantages & Disadvantages of FIFO Method :- Join Today For Smart Education

# First in first out (F.I.F.0.) Method :-

:- Under this method, materials are issued in the order in which they are received in the store.
:- The materials received first are issued first.
:- In other words, old stocks are issued first and new stocks are issued afterwards.
:- As a result of this system, when we value the closing stock of materials, that will be at the latest price.
:- This method of pricing is most suitable in times of falling prices because
the issue price of materials to jobs or works orders will be high
:- Materials issued form the earliest lots which were purchased at a higher price,
while the cost of replacement of materials will be low.
But in case of rising prices, this method is not suitable because
the issue price of materials to job or work orders will be low
while the cost of replacement of materials will be high.
❖ Advantages :-
(1) This method is simple and easy to operate.
(2) Closing stock of materials reflects at Current market price.
(3) This system is good for slow moving items of materials.
(4) This method is more useful when prices are falling in the market.
(5) Deterioration and obsolescence can be avoided.
❖ Disadvantages :-
(1) When prices fluctuate, calculation of becomes complicated.
(2) Complicated calculation will invite clerical errors.
(3) The cost of two similar jobs may be different,
though materials issued to them might be on the same day,
due to involvement two lots of different prices.
(4) When prices are falling, jobs are charged with higher price of earlier material lots
therefore the quotations are less Competitive.
(5) When excess materials are return to the store,

E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
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they are treated as new purchases for the purpose of next issue.
(6) This method shows a higher profit under rising prices.
The closing stock is unduly inflated due rise in price and hereby increase in profit.
This leads to a higher income tax liability.
=================================================================

Topic 12. Pricing For Returns & Shortage :-

[1] Returns to Store :-

# Materials return to stores from production department may be treated in two ways. :-
[A] At the same price at which materials were issued :-
Under this method, materials returned to stores are valued at the original price at which they were
issued.
:- These materials are kept separate and the next issue is made out of tem at the original price.
[B] At the current issue price :-
Under this method, materials returned to stores are valued at the current price.
:- This current price is also used when no information is available for the original issue price.
:- These materials are kept separate and the next issue is made out of them.

[2] Returns to Vendors (Suppliers) :- Download

:- If materials are retuned to vendors,
these should be priced at the same rate at which these were originally purchased.
:- If no information is available for the original purchase price,
the material is accounted at current issue price.
[3] Shortages :-
:- Shortages are treated as issues and accounted at current issue price.
=================================================================
[Ex.1] (col.) From the following transaction of Receipts and issue of Materials,
Prepare a Stores Ledger Account as per FIFO Methods of Mitshu Ltd., New Delhi for the month of July,
2018. The Company had 500 units valued Rs.2,000 as on 1st July, 2018.

Date Particulars Receipts (Units) Rate P.U. Issue (Units)

4-7-2018 Issue - - 200
5-7-2018 Receipts 200 4.25 -
10-7-2018 Issue - - 400
12-7-2018 Receipts 150 4.10
15-7-2018 Issue - - 200
20-7-2018 Receipts 300 4.50 -
25-7-2018 Receipts 400 4.00 -
30-7-2018 Issue - - 450
[Valuation of closing stock : 1200]
[Ex.2] From the following particulars of Rajmoti Ltd. prepare stock register as per FIFO Method.

Date Receipts Qty Rate Date Issues Qty

May, (kg.) (Rs.) May, 2018 (kg)
2018
4 Purchase of Raw Materials 500 5.0 7 Goods sold 400
15 Purchase of Raw Materials 600 6.0 28 Goods sold 1,500
18 Return of raw materials from
prod. dept. issued on 7th 100 --

E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
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25 Purchase of raw materials 700 6.50

The opening stock of raw materials on 01-05-2018 was 400 kg. of total cost Rs.1,600.
On 31-05-2018 there was a shortage of 10% of the stock.
[Valuation of Closing Stock : 2340]
--------------------------------------------------------------------------------
[Ex.3] (Col.) The following is an extract of the record of Receipts and Issue of a material.
Prepare Stores Ledger Account pricing the material issues on the basis of FIFO methods.
Date Particulars
1-07-2018 Opening balance 500 units @ Rs.20 per unit
5-07-2018 Issued 250 units
10-07-2018 Received 200 units from supplier @ Rs.19 per unit
15-07-2018 Returned 15 units from production department issued on 05-07-2018.
18-07-2018 Issued 180 units.
20-07-2018 Received 200 units form supplier @ Rs.21 per unit.
26-07-2018 Issued 275 units
30-07-2018 Returned 30 units from Production Department
31-07-2018 Issued 70 units
The Stock verifier had found a shortage of 10 units on 22-07-2018 and left a note accordingly.
[Valuation of Closing Stock : 3360]
--------------------------------------------------------------------------------
[Ex.4] The following is an extract of the record of Receipts and Issue of a material.
Prepare Stores Ledger Accounting pricing the material issues on the basis of FIFO methods.
Date Particulars
1-07-2018 Opening balance 1,000 units @ Rs.20 per unit
4-07-2018 Issued 500 units
10-07-2018 Received 400 units from supplier @ Rs.19 per unit
15-07-2018 Returned 30 units from production department issued on 04-07-2018.
19-07-2018 Issued 360 units.
20-07-2018 Received 400 units form supplier @ Rs.21 per unit.
26-07-2018 Issued 550 units
30-07-2018 Returned 60 units from Production Department
31-07-2018 Issued 140 units
The Stock verifier had found a shortage of 20 units on 22-07-2018 and left a note accordingly.
[Valuation of Closing Stock : 6720]
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LOWEST FEES = HIGHEST VALUE EDUCATION
( From Anywhere @ Anytime )
--------------------------------------------------------------------------------
[ILL.5] Store Ledger - FIFO Method - Treatment of Special Transactions.
FIFO Ltd. furnishes the following stores transactions for the month of September.
Date Transactions particulars
1 Opening balance 25 units valued at Rs.1,625
4 Issue Req.No.85 8 units
6 Receipts form B & Co.GRN No.26 50 units at Rs.57.5 per unit
7 Issue Req.No.97 12 units
10 Returned to B & Co. 10 units
12 Issues Req.No.108 15 units
13 Issues Req.No.110 20 units
15 Receipt from M & Co.GRN No.33 25 units at Rs.61.0 per unit
17 Issues Req.No.121 10 units

E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
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19 Received replacement form B & Co.GRN No.38 10 units

20 Returned from Dept. material of M & Co.MRR No.4 5 units
22 Transfer from Job K-2 to K-7, MTR No.10 5 units
26 Issues Req.No.146 10 units
29 Transfer from Department A to Department B MTR No.22 5 units
30 Shortage in stock Taking 2 units
Write up the Priced Stores Ledger on FIFO method and discuss
how you would treat the shortage in stock – taking.
❖ Solution :-
Priced Stores Ledger under FIFO Method
Date Particulars Receipts Issues Balanced
Qty. Rate Value Qty. Rate Value Qty. Rate Value
1 Opening Balance - - - - - - 25 65.00 1,625
4 Issue (Reqn. No.- 85) - - - 8 65.00 520 17 65.00 1,105
6 Received (GRN-26) 50 57.50 2,875 - - - 17 65.00 1,105
50 57.50 2,875
7 Issue(Reqn.No.-97) - - - 12 65.00 780 5 65.00 325
50 57.50 2,875
10 Returns to B & Co. - - - 10 57.50 575 5 65.00 325
40 57.50 2,300
12 Issue(Reqn.No.-108) - - - 5 65.00 325
10 57.50 575 30 57.50 1,725
13 Issue(Reqn.No.-110) - - - 20 57.50 1,150 10 57.50 575
15 Received (GRN-33) 25 61.00 1,525 - - - 10 57.50 575
25 61.00 1,525
17 Issue(Reqn.No.-121) - - - 10 57.50 575 25 61.00 1,525
19 Received (GRN-38) 10 57.50 575 - - - 25 61.00 1,525
10 57.50 575
20 M.R.R.-4 (Note 3) 5 57.50 287.5 - - - 5 57.50 287.5
0 25 61.00 1,525
10 57.50 575
26 Issue(Reqn.No.-146) - - - 5 57.50 287.5 20 61.00 1,220
5 61.00 305 10 57.50 575
30 Shortage - - - 2 61.00 122 18 61.00 1,098
(Note 4) 10 57.50 575
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[Ex.6] (Col.) XYZ Ltd furnishes the following store transactions for the month of July 2018.
(From the following information), you are required to prepare stores Ledger using FIFO method.
Date Transactions Units Rate (Rs.)
1 Opening balance 25 26
4 Issue 8 -
6 Receipts form B & Co. 50 23
7 Issue 12 -
9 Returned to stores 5 -
10 Returned to B & Co. 10 -
12 Issues 15 -
13 Issues 20 -
15 Receipt from M & Co. 25 24
17 Issues 10 -
19 Received replacement form B & Co. 10 -
20 Returned to stores out of issues made on 17th 5 -
E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
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22 Transfer from Job no. 101 to 105 in the department 5 -

26 Issues 10 -
29 Transfer from Department A to Department B 5 -
31 Shortage in stock Taking 2 -
[Valuation of Closing Stock : 784]
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[Ex.7] From the following particulars of material M of Theo limited,
Prepare a stock register of material per FIFO Method.
March, Particulars Inward No. Unit Qty.(Pcs) Rate Rs.
2018
1 Opening Stock Dozen 400 30.00
3 Purchases G/515 Dozen 500 36.00
9 Purchases T-616 Dozen 1,200 42.00
16 Send on Job no.21 -- -- 1,600 --
21 Purchases E/423 1 Piece 400 4.0
23 Sent on Job no.22 -- -- 500 --
On investigation it was found out that there was a shortage of 20 piece on 31st March.
[Valuation of Closing Stock : 1520]
--------------------------------------------------------------------------------

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--------------------------------------------------------------------------------

LIFO METHOD

Topic 13. What is LIFO Method ? :-

-: Advantages & Disadvantages of LIFO Method :-
# Last in first out (LIFO) Method :-
:- Under this method, material received last are issued first.
In other words, new stocks are issue first and old stocks are issued afterwards.
:- As a result of this, when we value the closing stock of materials, that will be at the old price.
:- This method of pricing of issue is most suitable in times of rising
because the issue price of materials to jobs or works orders is closely related to current market
price.
:- Under this system, the cost price of the product reflects the current market price.
:- In U.S.A. this has been the most popular method of pricing of issues,
though other countries too have adopted it.
❖ Advantages :- M = 82384 48020 , 99989 84152
(1) This method is simple and easy to operate.
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(2) Material cost in product reflects at current market price.
(3) There is better matching of Cost and Revenue.
(4) This method is more useful when prices are rising in the market.
(5) This method shows a lower profit under rising prices because closing stock is undervalued
thus leading to a possible saving in income tax.
(6) It facilitates complete recovery of material cost.
❖ Disadvantages :-
E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
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(1) When prices fluctuate, calculation becomes complicated.

(2) Complicated calculation will invite clerical errors.
(3) The cost of two similar jobs may be different,
though material issued to them might be on the same day,
due to involvement two lots of different prices.
(4) Closing stock of materials does not reflect current market price.
(5) The income tax department in India does not accept this method, as profitability shown is less.
=================================================================

Lowest Fees = Highest Value Education

Topic 14. Highest In First Out (HIFO) Method :-
# Under this method, materials of the highest price are issued first.
:- This method is based on the assumption that,
it is desirable to maintain the stock of materials at the lowest possible price.
:- Therefore, materials purchased at the highest price are issued first irrespective of the order of purchase;
when the whole lot of the highest price is exhausted,
materials purchased at the next higher price are issued.
:- This method is suitable for cost plus contracts.
Download
:- This method is most suitable when the market price is constantly fluctuating because
cost of heavily priced materials is recovered from the production at the earliest.
But it involves so many calculation as the production at the earliest.
But it involves so many calculations as it is the case with the FIFO and LIFO methods,
Hence, it is generally not used in modern organization.
:- It sounds well in theory, but in practice, it is not popular.
=================================================================

Topic 15. Next In First Out (NIFO) Method :-

:- This method attempts to value materials issues at an actual price

which is as near as possible to the market price.
:- Under this method, the material issues are prices at the market price of materials,
which has been ordered but not yet received by the organization.
Thus, issues are always at the latest price.
:- This method is better than market price methods under which every time when materials are issued,
their market price will have to be ascertained.
:- In case of this method, materials are issued at the price at which a new order has been placed
and this price will hold good for all future issues till a next order is placed.
But this method is also not popular.
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METHOD – 2 : SPECIFIC PRICE METHOD / BASE STOCK METHOD

Topic 16. Specific Price Method :-

:- When materials are purchased specifically for a particular job or work order,
the material issues are priced at the actual price paid for purchase of material for that job.
:- Under this method, materials purchased for specific jobs are kept separately and when issued,
the job is charged with the actual price paid.
:- Moreover, materials of special nature, costly items, etc.
when used for specific job or work order are priced at the actual price and charged to the work.

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:- This method is good on individual jobs, contracts, etc. against specific orders.
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Topic 17. Base Stock Method :-

:- In almost all organization, a minimum quantity of material in stock is always maintained in store.
:- This minimum quantity is known as “Base Stock” or “Emergency stock” or “Safety stock.”
:- The materials from the “Base Stock” should not be used unless emergency arise.
:- The base stock is created out of the first lot of the materials purchased by the organization
and therefore, it is always valued at a price at which the first lot of material is purchased.
:- The quantity in excess of this base stock is issued and valued either as per FIFO or LIFO methods.
:- Since the system operates in conjunction with FIFO and LIFO methods,
the advantages and disadvantages relating to FIFO and LIFO methods are applicable.
=================================================================
[Ex.8] (Col.) Following are the transactions of Receipt and
issue of Materials of Rinni Ltd. for the month of July, 2018.
Date Particulars Job No. Receipts Rate Issues
(Units) P.U. (Units)
01-07-2018 Received A 60 6.00 -
10-07-2018 Received B 90 7.0 -
15-07-2018 Issued A - - 40
20-07-2018 Issued B - - 40
25-07-2018 Received C 30 7.50 -
30-07-2018 Issued B - - 50
31-07-2018 Issued C - - 20
# Prepare Stores Ledger Account using :-
(1) Specific Price Method. (2) Base Stock Method assuming base stock of 40 units.
:- Use FIFO Method in conjunction with Base Stock Method.
[Specific Price Method : Valuation of Closing Stock :195]
[Base Stock Method : Valuation of Closing Stock :180]
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[Ex.9] Following are the transactions of Receipt and issue of Materials of Sunny Ltd.
for the month of August, 2018
Date Particulars Job No. Receipts Rate Issues
(Units) P.U. (Units)
01-08-2018 Received X 90 6.00 -
10-08-2018 Received Y 135 7.0 -
15-08-2018 Issued X - - 60
20-08-2018 Issued Y - - 60
25-08-2018 Received Z 45 7.50 -
30-08-2018 Issued Y - - 75
31-08-2018 Issued Z - - 30
# Prepare Stores Ledger Account using.
(1) Specific Price Method (2) Base Stock Method assuming base stock of 60 units.
:- Use FIFO Method in conjunction with Base Stock Method.
[Specific Price Method: Valuation of Closing Stock : 292.5]
[Base Stock Method : Valuation of Closing Stock : 270]
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METHOD – 3 : SIMPLE AVERAGE & WEIGHTED AVERAGE METHOD

Topic 18. Simple Average Price Method :-

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[1] Features :- Materials issued are valued at Average Price,

which is calculated by dividing the total or all units rate by the number of unit rates.
Total of unit rices of each purchase
Simple Average Price =
Total number of purchases
Example :- If Materials issued are from 3
consignment with prices of Rs.20, Rs.27
and Rs.22, the Simple Average Price
would be (20+27+22) 3 = Rs.23

[2] Advantages :-
(a) Useful when materials are received in uniform lots of similar quantity, else, it will give wrong
results.
(b) Useful when Purchase Prices do not fluctuate considerably.
(c) Simple to understand and easy to operate.
[3] Disadvantages :-
(a) Materials Issue Cost does not represent actual cost price.
Since the materials are issued at a price obtained by averaging cost prices,
a profit or loss may arise from such type of pricing.
(b) Gives incorrect results, if the prices of material fluctuate frequency.
(c) Price determination is unscientific, since there is averaging of prices without considering
quantity.
=================================================================

Topic 19. Weighted Average Price Method :-

[1] Meaning :- Weighted Average Price Method gives due weightage to quantities purchased
and the purchase price to determine the issue price.
Total Cost of Materials received Download
Weighted Average Price =
Total Quantity Purchased
Note :- Weighted Average Issue
Price is calculated by dividing the
Total Cost of Materials in Stock, by
the Total Quantity of Materials
Prior to each issue.
[2] Advantages :-
(a) It smoothens the price fluctuations, if any, due to material purchases.
(b) Issue prices need not be calculated for each issue unless new lot of materials is received.
[3] Disadvantages :-
(a) Material Cost does not represent actual cost price, but only an approximate average.
(b) It may be difficult to operate,
since every new lot received would require re-computation of issue prices.
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[Ex.10] The following particulars have been extracted in respect of a material.
Prepare the stores Ledger account showing the receipts and issues,
pricing the material issued on the basis of (a) simple average (b) weighted average
Year (2018) Particulars Qty Rate per
(kg) kg.(Rs.)
Jan.2 Received 2,000 10
Jan.6 Received 300 12

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Jan.9 Issued 1,200 --

Jan.10 Received 200 14
Jan.11 Issued 1,000 -
Jan.22 Received 300 11
Jan.31 Issued 200 --
[Simple Average Method: Valuation of Closing Stock : 2034]
[Weighted Avg. Method : Valuation of Closing Stock : 4346]
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[Ex.11] From the following details of Mahmad for the month of June, 2018
Prepare stock register as per Weighted average method.
Date : June, 2018 Particulars Units Rate (Rs.)
1 Purchases 3,400 5.00
3 Sales 2,000 --
6 Sales return -- --
rd
(From sale of 3 ) 200 --
8 Purchase 2,400 6.00
11 Purchase 1,000 7.60
12 Sales 3,000 --
17 Purchase 4,000 5.10
21 Sales 5,000 --
29 Purchase 400 7.50
On 30-06-2018, these was a shortage of 20 kg. known checking the stock.
[Closing stock: 8280]
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METHOD – 4 : PERIODIC SIMPLE AVERAGE METHOD &

PERIODIC WEIGHTED AVERAGE METHOD

Topic - 20(a). Periodic Simple Average Price Method :-

[1] Features :-
(a) At the end of each period, the price paid during that period
for various consignments are added up, and this total is divided
by the number of purchases made during the period.
(b) The rate so computed is then used to price all material issues made during the period,
and also for valuing the Closing Stock of Raw Materials.
Total of prices paid in a period
Periodic Simple Average Price =
No.of purchases in the period

Note :- This method is similar to Simple

Average price Method. However, the Average
M = 82384 48020 , 99989 84152
is calculated only at the end of the concerned
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period.

[2] Advantages :-
(a) It is simple to operate, as it avoids calculation of issue price after every receipt.
(b) This method can usefully be employed in costing continuous processes
where each individual order is absorbed
into the general cost of producing large quantities of articles.
[3] Disadvantages :-
(a) This method cannot be applied in jobbing industry
E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
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where each individual job order is to be priced at each stage of its completion.
(b) It is unscientific,
as it does not take into consideration the quantities purchased at different prices.
(c) It also suffers from all disadvantages of Simple Average Price Method.

Topic - 20(b). Periodic Weighted Average Price Method :-

[1] Features :-
(a) At the end of each period,
the total Costs for various consignments during that period are added up.
:- This Total Cost is divided by the total quantity purchased during the period.
Total Cost of Purchase in a period
Periodic Weighted Average Price =
Total Qty.purchased in the period

Note :- This method is similar to Simple

Average price Method. However, the Average
is calcu6ted only at the end of the concerned
period.
[2] Advantages :-
(a) This method is superior to Periodic Simple Average Price Method,
as it considers the quantities also.
(b) It nullifies or evens out the effect of fluctuations.
(c) This method also possesses all the advantages of Simple Weighted Average price method.
[3] Disadvantages :-
(a) It is not suitable for job costing because each job is to be priced at each stage of completion.
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[Ex.12] From the following transactions, prepare a Stores Ledger A/c for the month of July, 2018.
Date Particulars Unit (Quantity) Price P.U.
01-07-2018 Opening Stock 500 20
04-07-2018 Purchases 400 21
06-07-2018 Issue 600 --
08-07-2018 Purchases 800 24
09-07-2018 Issue 500 --
13-07-2018 Issue 300 --
24-07-2018 Purchases 500 25
28-07-2018 Issue 400 --
Use :-
(1) Simple Average Method is conjunction with FIFO Method. (2) Weighted Average Method.
(3) Periodic Simple Average Method (4) Periodic Weighted Average Method.
[(1) 9550; (2) 9705; (3) 8106; (4) 7638]
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[Ex.13] From the following transactions, prepare a Stores Ledger/c for the month of Aug, 2018.
Date Particulars Unit (Quantity) Price P.U.
01-08-2018 Opening Stock 750 40
04-08-2018 Purchases 600 42
06-08-2018 Issue 900 --
08-08-2018 Purchases 1,200 48
09-08-2018 Issue 750 --
13-08-2018 Issue 450 --
24-08-2018 Purchases 750 50
28-08-2018 Issue 600 --

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Use :-
(1) Simple Average Method is conjunction with FIFO Method. (2) Weighted Average Method.
(3) Periodic Simple Average Method (4) Periodic Weighted Average Method.
[Simple Avg. Method : Valuation of Cl. Stock : 28650]
[Weighted Avg. Method : Valuation of Cl. Stock : 29115]
[Periodic Simple Avg. Method : Valu. of CI.Stock : 24290]
[Periodic Weighted Avg. Method : Valu. of Cl. Stock : 22914]
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METHOD – 5 : STANDARD PRICE METHOD

❖ TYPES OF NOTIONAL COST METHOD. :-

Topic - 21. Standard Price Method :-

[1] Features :-
(a) Under this method, Materials are priced at a Pre-determined Rate or
Standard Price irrespective of the actual purchase cost of the materials.
(b) Standard Cost is usually determined considering factors like –
(i) Current prices, (ii) Anticipated market trends, and
(iii) Discount available and Transport Charges, etc.
[2] Advantages :-
(a) Simplifies the task of valuing issues of materials.
(b) Reduces clerical work.
(c) Facilities the control of Material Cost,
and the task of judging the efficiency of the Purchase Department.
[3] Disadvantages :-
(a) Standard Price does not reflect the Market Price, and thus results in a profit or loss.
(b) Fixing Standard Price become difficult when prices fluctuate frequently.
=================================================================
[Ex.14] (Col.) Following are the transactions of Receipts and payments of Materials ‘A’ of Jessy Ltd.
Date Particulars Receipts Price Per Unit Issue (Units)
(Units)
01-07-2018 Received 60 6.00 -
10-07-2018 Received 90 7.00 -
15-07-2018 Issued -- - 40
20-07-2018 Issued -- - 40
25-07-2018 Received 30 7.50 -
30-07-2018 Issued -- -- 50
31-07-2018 Issued -- -- 20
Prepare Stores Ledger Account using :- Standard Price Method assuming Standard Price Rs. 7.00 per unit.
[Closing Stock :- 165]
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[Ex.15] The purchases and issues of material X in the month of January, 2018 is as follows.
(i) Jan.3 :- Purchase 800 units @Rs.20 per unit
(ii) Jan.8 :- Purchase 700 units @ Rs.18 per unit
(iii) Jan. 9 :- Issue 600 unit
(iv) Jan. 11 :- Issue 800 unit
(v) Jan.17 :- Purchase 800 units @ Rs.20 per unit
(vi) Jan. 25 :- Purchase 500 units @ Rs.25 per unit
(vii) Jan. 31 :- Issue 1,000 units

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The standard price per unit of material is Rs. 20 fixed for the year 2018.
Show the Stores Ledger entries and determine the price variance for the month of January.
[Closing Stock : 9100]
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METHOD – 6 : INFLATED PRICE METHOD

Topic - 22. Inflated Price Method :-

:- In some cases, materials are issued above the cost price or purchase price.
:- The inflated price (higher than purchase price) includes not only cost of raw materials purchased but
cost of contingencies and the related costs.
:- Above all, certain losses arising out of evaporation, leakages and loss
due to loading and unloading of materials(like coal dust in coal) have to be recovered.
:- In all these circumstances, the price of materials is suitably inflated
to recover full cost of the material concerned.
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[ILL.16] (Col.) From the following particulars, calculate the issue price per 1000 bricks.
(1) Purchased 30,00,000 bricks at Rs.30 per 1,000 bricks.
(2) Breakage in handing the bricks.- 1% of the bricks purchased.
(3) Paid Carriage Charge for carrying all bricks form Klin to Stockyard @ Rs.1.50 per 1000 bricks.
(4) Paid Unloading Charges Rs.90.
(5) Paid stocking Charges in Stockyard Rs.180.
❖ Solution :-
Statement of Computation Total Cost of 30,00,000 bricks
Particular Amt. Rs.
(A) Purchase Less :
Bricks (Rs.)
30,00,000 ×30
100 30 90,000
100
30,00,000 (?)
(B) Carriage charges :
Bricks (Rs.)
30,00,000 ×1.5
1000 1.5 4500
1000
30,00,000 (?)
(C) Unloading Charges : 90
(D) Stocking Charges : ___180_______
Total Cost 94,770
⇨ Statement of Computation Total Cost of 30,00,000 bricks

Particulars Amt. Rs.

Bricks Purchase 30,00,000
Less: Breakage 1% of Bricks Purchase 30,000
Qty. of Bricks available for use 29,70,000
M = 82384 48020 , 99989 84152
Total Purchase Cost
Issue price of 1000 bricks =
Qty.available for use
94,770
= × 1000
29,70,000
= 31.91 Per thousand bricks
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[Ex.17] From the following particulars, calculate the issue price per 1000 Electric Tubes.

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(1) Purchased 20,00,000 Electric Tubes at Rs. 30 per 1,000 Electric Tubes.
(2) Breakage in handing the Electric Tubes. - 1% of the Electric Tubes purchased.
(3) Paid Carriage Charge for carrying all Electric Tubes form Company Warehouse
to Stockyard @ Rs.1.50 per 1000 Electric Tubes.
(4) Paid Unloading Charges Rs. 50.
(5) Paid stocking Charges in Stockyard Rs.180.
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[Ex.18] 3,000 feet of leather is purchased at 48 paise per foot. Normal wastage on account of cutting the
bundle of leather into pieces of one foot is estimated at 10%. The wastage has a salable value of 30 paise
per foot. Calculate the cost of material of work order requiring 450 pieces of cut leather.
[Rs.225]
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Topic - 23. Market Price Method :-

❖ Replacement Price or Realizable Price :
[1] Features :-
(a) Replacement Price is defined as the price
at which it is possible to purchase an item, identical to that which is being replaced or revalued.
(b) Under this method, Materials issued are valued at the Replacement Cost of the items.
(c) The method presumes that identical materials are available in the market at a certain cost.
[2] Advantages :-
:- Product Cost reflects Current Market Prices and it can be compared with the Selling Price.
:- Hence, the cost of Production and Material Values can be determined in periods of rising prices.
[3] Disadvantages :-
:- The use of the method requires the determination of market price of material before each issue.
:- Such a requirement creates problems.
:- Also, the Stores Ledger may show profit or loss arising due to difference
between Actual Cost and Replacement Price.
=================================================================

-: METHODS OF MATERIAL CONTROL :-

Topic - 24. Perpetual Inventory System :- May-14 ; Dec.-15

:- Under this system continuous record of Receipt, issue and Balance of material are maintained
by the storekeeper.
:- It shows the physical movement of the stocks and their current balances.
:- This system is usually supported by a programme of continuous stock taking.
:- Perpetual inventory system and continuous stock taking terms are loosely considered synonymous.
:- However, there is a difference between the two.
:- Perpetual inventory system means the system of record
whereas continuous stock taking means the physical checking of actual stock with records.
:- Strictly speaking, perpetual inventory system means maintenance of such records
(Bin cards and Stores Ledger) that will show the receipts, issues and balance
of all items in stock at all times.
:- But in order to ensure accuracy, the system must be supplemented
by a system of continuous stock taking which ensures that physical stock agrees with the book
figures. i.e. Bin Card or Stores Ledger.
# The success of this system depends upon the following :-
(1) Up to date writing up of Bin cards and Stores Ledger.
(2) Reconciling the quantity balances shown by Bin Card and Stores ledger.

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(3) Checking the physical balance of number of items every day systematically and in rotation.
(4) Explaining promptly the causes of variances between physical balances and Bin card balance.
(5) Making corrective entries where called for after noting the discrepancies.

March-17
# Advantages :-
(1) Under this system, it is not necessary to close the factory for annual stock taking.
(2) Profit and Loss Account for interim periods can be prepared promptly.
(3) Periodical checking of stores fixes responsibilities and keeps the staff alert.
It also has the moral check on the staff. This lessens the risk of loss, pilferage etc.
(4) Discrepancies are easily located and corrective action can be promptly taken to avoid their recurrence.
(5) Under this system various stock levels are fixed.
Fixation of these levels and constants watch on them assist the store keeper Download
in maintaining stocks within limits. The stock out situations can be avoided.
(6) It helps management to identify surplus, dormant, obsolete and slow moving items
of materials and take remedial action in time.
# Disadvantages :-
:- This system has some limitations too.
:- Unless the Bin Card and Stores Ledger are kept up-to-date,
effective control cannot be exercised and the work of continuous stock taking is hampered.
:- It is necessary that the balances shown by Bin cards and Stores Ledger agree with the actual stock.
=================================================================

METHOD – 7. FIXATION OF STOCK LEVEL

Topic - 25. Fixation Of Stock Levels :-

:- Various levels of stocks are fixed to see that no excess material is carried and simultaneously
there will not be any stock outs problems.
:- Fixation of stock levels depends upon two important factors.
(1) Rate of consumption;
(2) Lead-time (time-gap between placing an order and receiving the materials)
# The following stock levels are fixed for each item of material.
[1] Maximum Level :-
:- Maximum level is the upper limit beyond which the stock of material of any item is not normally allowed
to rise to ensure that unnecessary working capital is not blocked in stock of material.
:- Maximum stock level represents total safety stock level and
economic order quantity Maximum Stock level can be expressed in the formula given below.
Maximum Level = Re-order Level + E.O.Q. - (Minimum Consumption × Minimum period)
[2] Minimum Level :-
:- Minimum stock, level is the lower limit
below which the stock of material of any item should not normally be allowed to fall.
:- This level is also called safety stock or emergency stock level.
:- The main object of establishing this level is to protect against stock out problems,
in fixation of minimum stock level, average rate of consumption and the time required
for replenishment, i.e. lead time are given prime importance.
# Minimum Level = Re-order Level - (Normal consumption × Normal period )
[3] Re-Order Level :-
:- Re-order level is the level of stock when a new order for the purchase of material should be placed.
:- The store keeper will inform the purchase department for the purchase of fresh material

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when the stock of material reaches at this level.

:- This level is fixed between the minimum level and maximum level stock and
the following formula is useful for this purpose.
Re-order Level = Maximum Consumption × Maximum period OR
Re-order Level = Minimum Stock + (Normal consumption × Normal period)
[4] Danger Level :-
:- Danger Level is fixed below the minimum Level of stock of material and
if stock reached below this level urgent action for the fresh purchase of materials should be taken
to prevent stock out position.
Danger Level = Normal Consumption × Maximum period for Emergency Purchases

[5] Average Stock :-

𝟏
Average Stock = 𝟐 [Minimum level + Maximum level] M = 82384 48020 , 99989 84152

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=================================================================

Lowest Fees = Highest Value Education

[ILL.19] P.Ltd. used three types of materials A,B & C for production of ‘X’ product. The relevant monthlty
data for the components are given below.
Average usage in units : A-200, B-175, C-180
Minimum usage in units : A-100, B-100, C-90
Maximum usage in units : A-300, B-250, C-270
Recorder quantity in units : A-750, B-900, C-720
Recorder period in months : A-2 to 3, B-3 to 4, C-2 to 3
# Calculate for each component :-
(1) The reorder level, (2) The minimum level,
(3) The maximum level, (4) The average stock level.
# Solution :-
⇨ Recorder Level = Maximum Consumption × Maximum Time
A = 300 × 3 B = 250 × 4 C = 270 × 3

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= 900 Units = 1,000 Units = 810 Units

⇨ Minimum Level = Recorder Level - (Average Consumption × Average Time)
A = 900 - (200 × 2.5) B = 1,000 - (175 × 3.5) C = 810 - (180 × 2.5)
= 900 - 500 = 1,000 - 613 = 810 - 450
= 400 Units = 387 Units = 360 Units
⇨ Maximum Level=Recorder Level = (Maximum Consumption × Maximum Time) + Recorder Qty.
(EOQ)
A = 900 - (100 × 2) + 750 B = 1000-(100 × 3)+900 C = 810-(90 × 2)+720
= 900 - 200 + 750 = 1000 - 300 + 900 = 810 -180 + 720
= 1,450 Units = 1,600 Units = 1,350 Units
⇨ Average Level = 1/2 (Minimum Level + Maximum Level)
A = 1/2 (400+1450) B = 1/2 (387+1600) C = 1/2(360+1350)
= 1/2 x 1850 = 1/2 x 1,987 = 1/2 × 1,710
= 925 Units = 994 Units = 855 Units
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[Ex.20] A Ltd Co. uses three types of materials 'X', 'Y' and ‘Z' for production of the final product.
Particulars ‘X’ ‘Y’ ‘Z’
Normal usage (Units) 500 250 300
Minimum usage (Units) 150 100 200
Maximum usage (Units) 700 350 400
Reorder Quantity (Units) 900 750 500
Reorder Period (Weeks) 4-6 2-4 1-3
Calculate for each type of material :
(a) Recorder level (b) Minimum level (c) Maximum level (d) Average stock level
[Avg.level : X-3100 Units; Y-1300 units; Z-1050 units]
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[Ex.21] (Col.) Calculate the different levels of stock form the following information. :
Maximum Usage (Consumption ) : 400 units per week
Normal Usage (Consumption ) : 300 units per week
Minimum Usage (Consumption) : 250 units per week
Re-order Quantity (EOQ) : 1500 units
Re-order Period : 4-6 weeks
Emergency Period for purchase : 2 weeks [Avg.Level :1900 Units]
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[Ex.22] (Col.) In a factory three consumption A, B and C are used as follows.
Maximum Usage (Consumption) : 1350 units per week for each component
Normal Usage ( Consumption ) : 900 units per week for each component
Minimum Usage (Consumption) : 450 units per week for each component
Re-order Quantity (EOQ) : A=7,200 units; B=9,000 units; C=10,800 units
Re-order Period : A=2-4 weeks; B=4-6 weeks; C = 3-5 weeks
Emergency period for purchase : A=1 week; B=3 weeks ; C=2 weeks
Calculate all different levels.
[Avg.level : A-7200 Units; B-9450 units; C-9675 units]
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[Ex.23] In manufacturing its products, A Co. uses 3 raw materials; A, B & C.
in respect of which following information is available.
Usage per unit of product (in Ib) : A - 10; B - 4; C - 6;
Reorder quantity in units (in Ib) : A - 10,000; B - 5,000; C - 10,000;
Price per lb (in paise) A - 10; B - 30; C - 15;
Delivery period (in weeks) A - 1 to 3; B - 3 to 5; C - 2 to 4; Download
Ordering level (in Ib) A - 8,000 B - 4,750 C-?
Minimum Level (in Ib) A-? B-? C - 2,000
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:- Weekly production varies form 175 to 225 units.

:- Averaging 200, what would you expect the quantities of the following to be ?
(a) Minimum stock of A (b) Maximum stock of B
(c) Reorder level of C (d) Average stock of level of A
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Topic - 26. System of Always Better Control Method (ABC Analysis) :-

:- Generally, a firm has to maintain different types of materials.
All of them are not equal in value.
Some of them are 'High value' some of them are of 'Moderate value'
and some them are of ‘low value.'
It is often not possible for the management to exercise same degree of control over all items of materials.
:- Under ABC analysis, items of materials are controlled according to their 'values' or `financial
importance' classifying 3 categories /groups"
A Group - High Value items
B Group - Moderate Value items and
C Group - Low value items
:- The high value items of materials are controlled more closely than the low value items of materials.
Past experience shows that :
➢ High value items of materials represent very low percentage of total number of items of stock.
➢ Moderate value items of materials represent moderate percentage of total number of stock.
➢ Low value items of materials represent very high percentage of total number of items of stock.
➢ ABC analysis can be explained with the help of hypothetical example as follows.
Group Value of Material % of Total Number % of Total Value of
of Items (Units) Consumption of
materials
A High value /More Costly Items 10% 70%
B Moderate value/Less Costly 20% 20%
C items 70% 10%
Low value / Least Costly Items
Total 100% 100%
# The above table makes it clear that :
(1) 'A' category of items are small in quantity (10% of total units)
but they account for 'high in value' of total consumption of materials
(70% of total consumption of materials)
(2) ‘B’ category of items are 'moderate in quantity (20% of total units)
and they account for 'moderate in value' of total consumption of materials
(20% of total consumption of materials)
(3) 'C' category of items are 'large in quantity.
(70% of total units) but they account for ‘low in value' of total consumption of materials
(10% of total consumption of materials).
:- Management can exercise a very close control over 'A' category of items materials
since greatest monetary advantages will come by controlling these items,
Special attention should be given in estimating their requirements,
determining maximum level, re-order level, danger levels and minimum level.
:- Similarly, other techniques of material control should also be applied to 'A' category of items.
Since 'A' Category of items constitute the bulk of investment of working capital fund,
it would be worthwhile to bring them under close control and apply
modern material control techniques.
:- However, occasional or moderate control over 'B' category of items of materials
may be considered satisfactory and the frequent purchases and issues of these items
may be so planned as to keep them at minimum level.
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:- A little more attention should be given towards this group of items and
their purchase should be taken at quarterly intervals.
:- Regarding 'C' category of items of materials, control may be exercised in a general manner.
The purchase of these items should be on annual basis or once in six months or so.
It is obvious that since 'C' category of items do not have a high value,
the total investment in such items will not be large.
:- While exercising control over materials,
the following broad guidelines can be established in respect of each category of materials.
Sr.No. Particulars A Category B Category C Category
1 Control Very strict Normal Loose
2 Reports Weekly Monthly Quarterly
3 Follow up Continuous Periodic Occasion
4 Attention More Less Least
5 Purchasing Centralised Centralised / Decentralised
Decentralised
Frequently Quarterly Yearly
6 Safely Stock Very low Low High
7 Purchase Estimate Accurate Moderate Rough
8 Review over surplus
/Obsolete items Fortnightly Quaeterly Yearly
# Basic principles of ABC Analysis :-
:- Under this system, items are controlled according to their money value and
not according to the importance of the item in the production process.
# Advantages of ABC Analysis are as follows :-
(1) There is a closer control on costly items in which large amount of capital has been invested.
(2) Clerical cost can be reduced by placing the order and stock can be maintained at optimum level.
(3) It is possible to keep the minimum level of investment in material.
(4) Equal attention on all the items can be reduced.
It helps to concentrate on items according to the value of consumption.

# Quality Teaching
Limitations :- + Efficient Management = Best Result
:- In ABC analysis items are controlled according to their money value and
not according to the importance of the item in the production process.
:- It may sometimes create difficulties.
For example, an item may not be very costly and hence it may have been put in category 'c'.
:- However, the item may be scarcity.
:- Such an item as a matter of fact requires the at most attention of the management
though it is not advisable to do so as per the system of ABC analysis.
:- Hence, ABC Analysis should not be followed blindly.
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Topic - 27. VED Analysis :- Jan-14 ; March.-16

:-This analysis is used generally for Spare-parts.

:-The requirements and urgency of spare parts and different from that raw materials.
:-ABC analysis may not be property used for spare parts.
:-The demand and urgency for spare parts depends upon the performance of the plant and machinery.
:-The spare parts are classified into 3 categories/group.
V - Group :- Vital E - Group :- Essential and D - Group :- Desirable
# V - Vital :- spare parts are must for smooth running of the concern and these must be stored
adequately.

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:- The non-availability of these spare, parts at the required time may cause stoppage of production.
:- It may disturb the production process and even may stop the production process too.
(For example :- Gear Wire in Scooter)
# E – Essential :- spare parts are necessary for smooth running of the concern and
these must be stocked in adequate quantity.
:- There should be adequate arrangement for replenishment of these parts at a short notice.
(For example : Break Wire in Scooter).
# D – Desirable :- Items of spare parts do not cause any immediate loss of production.
:- If the lead time of these spare parts is less, then stocking of these spare parts should be avoided.
(For example : Head Light in Scooter)
:- The classification of items of spare parts is important from the point of view of production.
:- A wrong classification of any item of spare part may create serious problem for production process.
:- The classification of spare part should be left to the technical staff because
they know the need, urgency and utility of these spares.
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Topic - 28. Concept of JIT & Inventory Management :-

:- The major emphasis of just in Time (JIT) is inventory management.
:- It aims at eliminating as far as possible all manufacturing and finished goods inventories.
:- It tries to ensure that nothing is processed that is not needed.
:- JIT System involves the total quality management, redesign of plant layout,
reschedule of receipts of raw materials and the delivery of finished goods.
:- It eliminates unnecessary waste due to over production.
:- A JIT system calls for the steady, and frequent delivery of parts and materials from suppliers.
:- It requires a reduction in the lead time of supplier so that
the manufacturer can tune the supplier's material releases to the actual consumption rates
in the process.
:- The special feature of JIT is that materials or parts are generated in the exact quantity required
and just in time when they are needed.
:- A classic JIT system consist of series of manufacturing units
each delivering to one another in successive stage of production.
:- The amount delivered by each unit to the next unit is exactly what
the needs for the next production period (usually one day).
:- There are no safety margins in the form of buffer stocks.
:- The JIT system minimizes the inventory and its associated costs
within the whole manufacturing / supply chain.
# The benefits of J IT system are :-
(a) The right quantities are purchased or produced at the right time.
(b) The cost-effective production or operation of correct services as and when required.
(c) The minimization of inventory work in progress and waste.
(d) The systematic identification of problems and the development of technology
based tools for correcting identified problems.
(e) The production of goods which meet exactly the needs of customers immediately on demand.
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Topic - 29. Concept of Economic Order Quantity (EOQ) :- Dec.-15

:- Economic order quantity (EOQ) is that size of the order which gives
maximum economy in purchasing any material and ultimately contributes
towards maintaining the materials at the optimum level and at the minimum cost.
:- Economic order quantity is the quantity to be ordered at the re-order level.
:- It is the quantity, which gives lowest cost of material ordered.
:- It minimizes the combined annual costs of placing an order and cost carrying material stock.

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:- The quantity to order at a given time must be determined by balancing two factors :
(1) The cost of possessing or carrying materials and
(2) The cost of acquiring of ordering materials.
:- Purchasing larger quantities may decrease the unit cost of acquisition, but
this saving may not be more than offset by the cost of carrying materials
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in stock for a longer period of time.
:- Ordering costs and carrying costs are inversely related. Join Today For Smart Education
:- When one increase, the other decrease.
:- In other words, the economic order quantity (EOQ) is the size/quantity inventory to be ordered
at one time for purposes of minimizing annual inventory cost.
# The carrying cost of inventory may include :-
:- Insurance charges of materials = Property tax, Rent of storehouse
:- Electricity charges of Stores department = Telephone Charges
:- Salary of Storekeeper =. Deterioration and shrinkage of stocks, Obsolescence of stocks.
:- Interest on investment of working capital
# The Ordering Cost of inventory may include :-
:- Cost of inviting tenders = Cost of placing orders
:- Telephone Expenses - Postage Expenses
:- Stationary Expenses - Staff Salary (Purchase Department)
:- Cost of receiving materials
:- Loading charges - Un-loading charges (Receiving Department)
:- Cost of inspecting materials - Stationary, Cards etc. (Inspection Department)
# Underlying Assumptions of Economic Order Quantity :-
(1) The ordering and carrying cost is known and constant
(2) The rate of consumption is known and constant.
(3) The purchase price of the item is constant.
(4) The replenishment is made instantaneously; the whole batch is delivered at once.
# EOQ can be calculated as follows. :-
❖ EOQ Join the Best
2𝐴𝑂
(Units) = √ 𝐶
To be theDownload
A = Annual Consumption of Materials in terms of unit
Best
O = Ordering Cost of Materials per order
C = Carrying Cost of Material Per unit Per Annum
(Material Cost per Unit × % Carrying Cost per Annum)
❖ EOQ
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑
(Rs.) = √2𝐴𝑂𝐶 → Number of Orders =
𝐸𝑂𝑄
12 Months
→ Time between two Consecutive Orders =
Number of Orders
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METHOD – 8. ECONOMIC ORDER QUANTITY

[ILL.24] (Col.) About 50 units are required everyday for a machine. A fixed cost Rs.50 per order is incurred
for placing an order. The carrying cost of material per unit amounts to Re.0.02 per day. Compute EOQ.
Solution :-
❖ A = Annual consumption
= 50 × 365 days
= 18,250
❖ 0 = Ordinary cost per days
= 50

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❖ C = Carrying cost
= 0.02 per unit per day × 365
= 7.3
2𝐴𝑂
(1) EOQ (Units) = √
𝐶
2 ×18.250 ×50
=√ = 500 Units
7.3
(2) EOQ (Rs.) = √2𝐴𝑂𝐶
= √2 × 18.250 × 7.3 × 50 = 3650 Rs.
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[Ex.24] The annual demand fora product of a company is 26,000 units at Rs.90 per unit. The company can
purchase it at Rs. 65 per unit. Assuming carrying cost @ 20 % of average inventory value (purchase price)
and fixed cost per order is Rs.1,000. Determine the EOQ.
[EOQ (units)-2000, EOQ (Amt.Rs.)-26000]
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[ILL.25] (Col.) The following data are available.
(1.) Annual Consumption of Material = 24,300 units (360 days)
(2.) Purchase price per unit = Rs.10
(3.) Ordering cost per order = Rs.40
(4.) Carrying cost per unit per annum = 24% of average material cost
You are required to find out how many units should be ordered for each time? i.e. EOQ.
Solution :-
❖ A = 24,300 ❖ C = 24% of Avg. Material cost ❖ O = Rs.40 = 10 × 24% = 2.4
2𝐴𝑂
(1) EOQ (Units) = √ 𝐶
2 ×24.300 ×40
=√ = 900 Units
2.4
(2) EOQ (Rs.) = √2𝐴𝑂𝐶
= √2 × 24,300 × 40 × 24 = 2160 Rs.

[Ex.26] From the following data of a component, you are required to fins out EOQ (units).
(1) Purchase price per component = Rs.200
(2) Ordering cost per order = Rs.100
(3) Carrying cost per unit per annum = 10% of purchase price of component
(4) Total cost of ordering and carrying material p.a. = Rs.4,000
[EOQ (units)-200, EOQ (Amt.Rs.)-4000]
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[Ex.27] (Col.) A factory requires 1,500 units of an item of material per month each costing Rs.27. The cost
per order is Rs.150 and the inventory carrying cost up to 20% at Average inventory p.a. Find out (1) EOQ (2)
No. of orders per year would you accept 2% price discount on a minimum supply quantity at 1,200 units
compute the total costs in both the cases.
[Total Cost : 1000 units=491400; 1200 units=481705.20]
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[Ex.28] (Col.) The annual requirement of an item of material is 12,000 Units, each costing Rs.6 each.
Ordering cost is Rs.200 per order & inventory carrying cost is 20% of Average inventory p.a. Find out (A)
EOQ and corresponding total inventory cost. (B) Whether the item should de purchased in lots of 6,000
Units at a time if price p.u. is reduced by 5% for this quantity.
[(A) EOQ (units)-2000, EOQ (Amt.Rs.)-72220]
[(B) Total Cost : 2000 units=74400; 6000 units=30632]
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[Ex.29] A Ltd. produces a product, which has a monthly demand of 4,000 units. The product requires a
component X which is purchased at Rs. 20. For every finished product, one unit of component is required.
The ordering cost is Rs.120 per order and the holding cost is 10% p.a. Calculate :
(1) EOQ (Units) ) (Rs.) ;
(2) If the minimum lot size to be supplied by the supplier is 4,000 units,
what is extra cost the company has to incur ?
(3) What is the minimum carrying cost the company has to incur, if EOQ is not adopted ?
[(i) EOQ (units)-2400, EOQ (Amt.Rs.)-4800]
[(ii) Extra Cost : 640 units=964800; (iii) Rs.4000]
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[Ex.30] (Col.) HCL Ltd .furnishes the following information.
(i) Consumption per quarter - 300 units (ii) Cost per unit - Rs.40
(iii) Cost of processing an order -Rs. 600 (iv) Obsolescence - 15%
(v) Insurance on inventory-25%. Compute:
(a) EOQ (units) (b) No. of orders per year &
(c) Time between two consecutive orders.
A supplier offers a discount of 2% on a purchase of 600 units Should it be accepted ?
[(A) EOQ (units)-300; EOQ (Amt.Rs.)-4800; (B) No.of order : 4;
(C) 2; Total Cost : 300 units=52800; 600 units=52944]
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[Ex.31] (Col.) TCH Ltd. provides the following information in respect of material x :
Supply period : 5 to 15 days
Rate of consumption : Average -15 units per day, Maximum - 20 units per day,
Minimum -10 units per day. Yearly 5,000 units
Ordering costs are Rs. 20 per order, purchase price per unit is Rs. 50, Storage cost are 10% of the unit value.
Compute :- (i) Re-order level; (ii) Minimum level (iii) Maximum level; (iv) EOQ
[(i) ROL-300; (ii) Minimum Level-150; (iii) Maximum Level-450;
(iv) EOQ (units)-200, EOQ (Rs.)=1000]
[Ex.32] (Col) The particulars of material A are as follows :
About 200 units are required per quarter, Rs.100 per order is incurred for placing an order. The inventory
carrying cost per unit is cost per is Rs. 4. The Re-order level is 350 units. The minimum usage is 25, units per
week and the re-order: period is 4 to 6 weeks. Compute : (a) EOQ & (b) Maximum level.
[(i),E0Q (units)-200; (ii) EOQ (Amt.Rs.)-800; (iii) Maximim Level-450 units]
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[Ex.33] (Col.) A Company manufactures a product from a raw material, which is purchased at Rs.60 per kg.
The company incurs a handling cost of Rs. 360 plus freight of Rs.390 per order. The incremental carrying
cost.of inventory of raw material is Re.0.50 per kg per month.
In addition, the cost of working capital finance on the investment in inventory of raw material is Rs.9 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 material.
(ii) Advise, how frequently should orders for procurement be placed.
(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 ?
[(I) EOQ (units)-2000; (ii) EOQ (Amt.Rs.)-30,000; (iii) Discount Rate-2]
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