Material Costing Handout November 2020

MATERIALS

Summary and Formulas to Take Note:

Stock Levels Formula:

Re-Order Level = Maximum Usage x Maximum Lead time [or]
Re-order Level = Minimum Stock Level + (Average Usage x Average Lead time) [or]
Re-Order Level = Safety Stock + Lead time Consumption [or]
Maximum Level = Reorder Level + Re-Order Quantity – (Minimum Usage x Minimum Lead time)
Minmum Level = Re-Order Level – (Average Usage x Average Lead time)
Average Level = (Maximum Level + Minimum Level)/2 [or]
Avergae Level = Minimum Level + ½ Re-Order Quantity
Danger Level = Average usage x Lead time for emergency purchases [or]
Danger Level = Minimum Usage x Minimum Lead time [or]
Danger Level = Minimum Usage x Average Lead time.
Where multiple formulas are given for the same level, formula usage shall be based on fact pattern
available in the question.

Economic Order Quantity (Wilson’s model) = √(2xAnnual RequirementxOrdering cost per

order)/Carrying cost per unit.
Who is Wilson, Well does it really matter who he is?? That damn guy gave us this formula to
remember and not who he was so lets cut the damn story and get down to business…
The square root applies for the whole equation since this is word file m putting it this way. While
solving in class u ll c the real square root symbol.
½ Associated Costs @ EOQ = Carrying Cost = Ordering Cost thus always ordering and carrying costs
are equal t EOQ (subject to safety stock)
Ordering costs = No of Orders x Ordering cost per order
No of Orders = Annual Requirement/ EOQ or ROQ
Carrying Costs = Average Inventory x Carrying Costs per unit
Average Inventory = (EOQ/ROQ) / 2

Inventory Turnover Ratio = Consumption of Materials/ Average Stock of Materials

Consumption of Materials = Opening Stock + Purchases – Closing Stock
Average Stock = (Opening Stock + Closing Stock) /2
Stock Holding Period = 365 days/(Material turnover ratio) – If the question gives 360 days kindly
take 360.

If Question is silent on details of ROQ but gives details in EOQ, kindly consider EOQ as ROQ

Assumptions for Wilsons model:

1. Annual Requirement is fixed and known
2. Cost per unit is fixed and constant
3. Ordering and carrying cost at a order level and a unit level are fixed and known
4. Quantity ordered is received immediately without any lead time.

Well that quite sums up the quick summarised points u guys need to remember. Now that
we’ve seen the formulas lets focus on implementing them… Enjoy solving and learning.

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PRACTICE PROBLEMS

1. From the following information classify the inventory items into A, B and C
Categories

Material K1 K2 K3 K4 K5 K6 K7
Maximum 2030 1250 400 5200 200 3500 1000
stock- units
Minimum 470 930 120 2320 160 1740 680
stock in units
Average cost 12 90.10 150 5 50 2.5 16
per unit in Rs

2. (Nov 2008) The annual carrying cost of Material X is Rs. 3.60 per unit and its total
carrying cost is Rs 9000 per annum. What would be the economic order quantity for
Material X . If there is no safety stock of Material X?

3. (RTP) About 50 items are required everyday for a machine. A fixed cost of Rs 50 per
order is incurred for placing an order. The inventory carrying cost per item amounts
to Rs 0.02 per day. The lead period is 32 days. Compute (1) EOQ (2) Re order level (3)
No of orders per year (4) Time lag between 2 purchases and (5) Associated cost.

4. (Nov 2009) Compute EOQ and the total variable cost for the following

 Annual Demand- 5000 units

 Unit Price- Rs 20
 Order Cost – Rs 16
 Storage Rate- 2% per annum.
 Interest Rate- 12% per annum
 Obsolescence rate- 6% per annum.

Determine the total variable cost that would result for the items if an incorrect price
of Rs 12.80 is used.

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5. (RTP) A company is deciding on the EOQ for 2 brands of lawn fertilizers- Super Grow
and Nature own. The following information Is collected

Particulars Super Grow fertilizer Nature Own Fertilizer

Annual Demand 2000 bags 1280 bags
Relevant ordering cost Rs 1200 Rs 1400
per purchase order
Annual Relevant carrying Rs 480 Rs 560
cost per bag

1. Compute EQO for super grow and nature own

2. For the EOQ , what is the sum of the total annual relevant ordering costs and
total annual relevant carrying costs for super grow and nature’s own
3. For the EOQ, compute the number of deliveries per year for super grow and
nature’s own

6. (May 2005) A company manufactures a special product. The following particulars are
collected for the year

Annual Consumption 12000 units (360 days )

Cost per unit Rs 1
Ordering Cost Rs 12 per order
Inventory carrying cost 24%
Normal Lead time 15 days
Safety stock 30 days consumption

Required (1) Compute Re-order quantity and re order level (2) What should be the
inventory level (ideally) immediately before the material order is received.

7. (RTP) A company buys in lots of 500 boxes which is a 3 months’ supply. The cost per
box is Rs 125 and the ordering cost is Rs 250 per order. The inventory carrying cost is
estimated at 20% of the unit value per annum.

What is the total annual cost of the existing inventory policy?

How much money could be saved by employing the EOQ

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8. (Nov 2008) A co purchases 72000 rims of a special type paper per annum at a cost of
Rs 90 per rim. Ordering cost per order is Rs 500 and the carrying cost is 5% per year
of the inventory cost. Normal lead time is 20 days and the safety stock is nil. Assume
300 working days in a year. Required
1. Calculate the EOQ
2. Calculate the reorder inventory level
3. If a 1% quantity discount is offered by the supplier for purchases in lots of 18000
rims or more, should the publishing house accept the proposal.

9. (RTP) A company uses a purchases component in an assembly. It follows policy of

EOQ for procurement of the component. The purchase price of the component is Rs
800 each and the cost of carrying one unit is 15% per annum. The cost of placing an
order is Rs 150. The company has estimated the total cost of carrying cost and order
placement at Rs 36000. The supplier has offered a discount of 3% on the purchase
price if the entire requirement of the component is covered in two purchase orders
in a year.

Find the EOQ

Calculate the total cost of component procurement and storage if the discount offer
is accepted. Compare this cost with the total cost of the EOQ.

What further discount if any should be negotiated for minimising the cost. Assume
that the inventory carrying cost does not vary according to discount policy.

10. (Nov 2012) A company produces Product M which has a quarterly demand of 8000
units. The product requires 3 kgs quantity of material X for every finished unit of
product. The other information are as follows

Cost of material X- 20 per kg, Cost of placing order – Rs 1000 per order, carrying cost
-15% p.a of average inventory

Calculate the EOQ for material X

Should the company accept an offer of 2% discount by the supplier, if he wants to

supply the annual requirement of Material X in 4 equal quarterly instalments.

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11. (May 2018) An entity manufactures a special product which requires a component
Sky blue with the following particulars

Annual Demand of Sky Blue 12000 units

Cost of placing order Rs 1800
Cost per unit of Sky Blue Rs 640
Carrying cost per annum 18.75%

The company has been offered a quantity discount of 5% on the purchases of sky
blue provided the order size is 3000 components at a time. You are required to

1. Compute EOQ
2. Advise whether the quantity discount offer can be accepted

12. (May 2018) A manufacturer produces a product which requires a component costing
Rs 1000 per unit. Other information related to component are as under

Usage of component 1500 units per month

Ordering cost Rs 75 per order
Storage cost rate 2% per annum
Obsolescence Rate 1% per annum
Maximum usage 400 units per week
Lead Time 6-8 weeks

The firm has been offered a quantity discount of 5% by the supplier on the purchase
of component, if the order size is 6000 units at a time. Compute (a) EOQ (b) Reorder
level (c) Advise whether the discount offer be accepted by the firm

13. (RTP) The stock control policy of a company is that each stock is ordered twice a
year. The quantum of each order being one half of the years forecast demand
The materials manager, however wishes to introduce a policy in which for each item
of stock, reorder levels and EOQ is calculated. For one of the items X, the following
information is available

Forecast annual demand 3600 units

Cost per unit Rs 100
Cost of placing an order Rs 40
Stock Holding cost 20% of average stock value
Lead Time 1 month

It is estimated by the materials manager that for item X a buffer stock of additional
100 units should be provided to cover fluctuations in demand

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If the new policy is adopted, calculate for stock item X

1. Reorder level that should be set by the material manager

2. Anticipated reduction in the value of the average stock investment
3. Anticipated reduction in the total inventory costs in the first and subsequent
years.

14. (May 2008) A company supplies plastic crockery to fast food restaurants in a
metropolitan city. One of its products is a special bowl, disposable after initial use,
for serving soups to its customers. These bowls are sold in packs of 10 pieces at a
price of Rs 50 per pack.

The demand for plastic bowl has been forecasted at a fairly steady rate of 40000
packs every year. The company purchases the bowl direct from a manufacturer at Rs
40 per pack, within a 3 days lead time. The ordering and related cost is Rs 8 per
order. The storage cost is 10% per annum of average inventory investment. You are
required to

1. Calculate EOQ
2. Calculate the number of orders needed every year
3. Calculate the total cost of ordering and storage of bowls for the year
4. Determine when should the next order to be placed. Assume that the company
does not maintain a safety stock and that the present inventory level is 333 packs
with a year of 360 working days

15. (May 2009) A company is reviewing its stock policy and has the following
alternatives available for the evaluation of stock

Purchase stock twice a month 400 units

Purchase monthly 800 units
Purchase every 3 months 2400 units
Purchase every 6 months 4800 units
Purchase annually 9600 units

It is ascertained that the purchase price per unit is Rs 40 for deliveries upto 2000
units. A 5% discount is offered by the supplier on the whole order where deliveries
are 2001 to 4000 units and 10% reduction on total order for deliveries in excess of
4000 units. Each purchase order incurs administration costs of Rs 250. Interest on
capital and other storage costs are Rs 12.50 per unit of average stock quantity held.
Calculate the optimum order size.

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16. (Nov 2010) A company has received an offer of quantity discount on its order of
materials as under

Price per Rs 4800 Rs 4680 Rs 4560 Rs 4440 Rs 4320

tonne
Tonnes no Less than 50 and 100 and 200 and 300 and
50 less than less than less than above
100 200 300

The annual requirement for the material is 500 tonnes. The ordering cost per order is
Rs 6250 and the stock holding cost is estimated at 25% of material cost per annum.

1. Compute the most economical purchase level

2. Compute EOQ if there are no purchase discounts and the price per tonne is Rs
5250.

17. (Nov 2004) A company requires 25000 tons of a raw material annually. It costs Rs
10000 per order and carrying costs are Rs 50 per ton per annum (including interest
of Rs 28). It has received the following quotations from local suppliers for the next
years supply.

Lot Size Upto 4999 5000-9999 10000-24999 25000 and

tons tons tons above
Unit Rate Rs 100 Rs 98 Rs 95 Rs 90

1. Advise the company regarding the most optimum order quantity

2. A German supplier has offered a price of Rs.75 per ton for 25000 tons in a single
shipment. For this shipment, Additional special packing expenses would be Rs.
1,00,000. Advise whether this offer can be accepted in preference to (1) above.
3. Would your advice to (2) differ, if the packing expenses were Rs.1,50,000? What
will be the maximum packing expenses that can be borne by the Company?

18. (RTP) AAL produces edible oil of different varieties. The monthly demand pattern for
the finished products are –
Mustard Oil – 45,000 Litres Soya bean Oil – 15000 Litres, Olive Oil – 3,000 Litres.

To produce 1 litre of Mustard oil, Soya bean Oil and Olive Oil, 5Kg if Mustards, 6Kg of
Soybeans and 4.5 Kg of Olives are required respectively. There is no Opening and
Closing Stock of Materials. AAL can purchase the Materials either from the Farmers

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directly or from the wholesale Market. Following is the material wise summary
related to Purchase of Materials.

Particulars Mustards Soya Beans Olive

Source of Wholesal Farmers Wholesal Farmers Wholesal Farmers
Purchase e e e
Min Pur Qty Any Qty 13,50,00 Any Qty 2,70,00 Any Qty 1,62,00
0 Kg 0 Kg 0 Kg
Purchase 15.3 12.5 11 9 36 30.80
Price per Kg
Transporatio 6000 15000 9000 12000 3000 11000
n Cost per
purchase
Sorting & - 1200 - 800 1800 -
piling cost
per purchase
Loading cost 10 5 10 3 10 25
per 50 Kg
Unloading 2 2 2 2 2 2
Cost per
50Kg

The company is paying 12.5% p.a. as interest to its Bank for cash credit facility and
Rs.100 per 100kg as Rent to the warehouse.

1. Calculate the purchase cost of each material – (a) from Wholesale Market, and
(b) from the Farmers.
2. Calculate Economic order Quantity of each Material under the Both options.
3. Recommend the Best Purchase Option for the Material Olive either EOQ for
wholesale or the upfront purchase from farmers.

19. A Ltd. Produces a product Exe using a Raw Material Dee. To Produce one unit of Exe.
2Kgs of Dee is required. As per the sales forecast conducted by the company, it will
be able to sell 10,000 units of Exe in the upcoming year. The following is the
information regarding the Raw Material Dee:
a. ROQ is 200 Kg less than EOQ.
b. Max Consumption per day is 20Kg more than the avg consumption per day.
c. There is an opening stock of 1000 Kg.
d. Time required to get raw material from suppliers is 4 to 8 days.
e. Purchase price is Rs.125 per kg.

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There is an opening stock of 900 units of the Finished product Exe. The rate of
interest charged by Bank on Cash credit Facility is 13.76%. To place an order, the
company has to incur Rs.720 on paper and Documentation work.

From the above and taking 364 days a year, find out the following in relation to Raw
Material Dee – (a) ROQ (b) Max Stock Level (c) Min Stock Level (d) Impact on the
company’s Profitability by not ordering the EOQ.

20. (Nov 2014) Following details relate to a manufacturing Firm: Find (a) Maximum
consumption per day (b) Minimum Consumption per day.

ROL – 1,60,000 units

EOQ – 90,000 Units
Minimum Stock Level – 1,00,000 units
Maximum Stock Level – 1,90,000 units.
Average Lead time – 6 Days
Difference between Minimum Lead time and Maximum Lead time – 4 Days.

21. (Nov 2009) A Company Requires 1000 units of material X on an average for a week
which is purchased at a price of Rs.30 per unit. The ordering cost is Rs.150 per
purchase order and inventory carrying costs per unit amounts to Rs.0.06 per week.
The Re-order period is 1 to 3 weeks and the weekly usage of Material X varies from
750 to 1250 units. Calculate: 1. EOQ 2. ROL 3.Min Level 4. Max Level.

22. (Nov 2013) Primex Limited produces product P. It uses annually 60,000 units of a
Material Rex costing to Rs.10 per unit. Other relevant information are:
Cost of placing an order: Rs.800 per order
Carrying cost 15% per annum of average inventory
Re-order period 10 days
Safety stock 600 units
The company operate 300 days in a year. Calculate:
a. EOQ of Rex
b. Maximum Stock level
c. Re-order Level
d. Average Stock Level

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23. (Nov 2018 New) JJ Private Limited manufactures 20,000 units of a product per
month. The cost of placing an order is Rs.1,500. The purchase price of the Raw
Material is Rs.100 per kg. The Re-order period is 5-7 weeks. Consumption of RM
varies from 200 to 300 Kg per week. The Avg consumption being 250 Kg. Carrying
cost of inventory is 9.75% per annum.

Compute:
1. ROQ
2. ROL
3. Max Stock Level
4. Min Stock Level
5. Avg Stock Level

24. (Nov 2016) S Ltd manufactures, energy saving bulbs. To manufacture the Finished
product, one unit of component LED is required. Annual requirement of Component
LED is 72,000 units being the cost Rs.300 per unit.

Ordering Cost = Rs, 2,250 per order

Carrying Cost = 12% per annum
Lead Time – Max 20 Min 8 Avg 14 Emergency 5.
Consumption – Max 400 Min 200 Avg 300.

Calculate: 1. ROQ 2. ROL 3. Min Stock Level 4. Max Stock Level 5. Danger Level.

25. (May 2018 New) Following details are provided by SKU enterprises for the year
ended 31st March:
Particulars Material M Material N
st
Stock as on 1 April 6,00,000 10,00,000
st
Stock as on 31 Of March 4,50,000 7,25,000
Purchases during the year. 9,50,000 18,40,000

Calculate Turnover ratio of both materials, Advise which one Is fast moving (assume
360 days year)

26. The following information is given for the period ended for peacock ltd.

Particulars A B C D
Op Stock 200 Kgs 200 Kgs 150 Kgs 250 Kgs
Purchases 150 Kgs 200 Kgs 150 Kgs 150 Kgs
Cl Stock 180 Kgs 320 Kgs 285 Kgs 265 Kgs

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For the next year, the company expects the consumption to be 20% higher than the
last year. The company desires to hold a stock equivalent to 3 months Consumption
at the end of the next year. Excess stock if any has to be disposed off. Determine
purchase and disposal qty for next year if any.

27. (RTP) A Limited purchases two materials X and Y. The Invoice showed the following
details –
Material X 4000 Kgs @ Rs.2.5 per kg & Y 3,200 Kgs @ 3.25 per kg Rs.20,400
Special packing charge @ 4% (to be apportioned on the Mtrl cost) Rs.816
GST @ 18% on the total of material and packing charges Rs.3,819
Freight Rs.384

Total Invoice Value Rs.25,419

Normal transit loss is taken at 5% and 4% of the invoice quantity. The company
would like to make a further provision of 5% for storage loss. What should be the
price per Kg i.e, landed cost for material issue pricing purposes. Make suitable
assumptions for GST.

28. (May 2011) Prepare a stores ledger account from the following transactions in
October of XY Company limited.
October 1 – Opening Balance of 200 units @ Rs.10 per unit.
October 5 – Receipt 250 units costing Rs.2,000
October 8 – Receipts 150 units costing Rs.1,275
October 10 – Issue 100 units
October 15 – Receipts 50 units costing Rs.500
October 20 – Shortage 20 units.
October 21 – Receipts 60 units costing Rs.540
October 22 – Issue 400 units.

Issues upto 10th October will be priced at LIFO and from 11th October, issues will be
priced at FIFO. Shortage will be charged as Overheads.

29. Following are the details of receipts and issues of a material of stores in a
manufacturing company for the period of 3 months ending 30 th June

Receipts
Date Quantity Kgs Rate per Kg
April 10 1600 5
April 20 2400 4.90
May 5 1000 5.10
May 17 1100 5.20

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May 25 800 5.25

June 11 900 5.40
June 24 1400 5.50

Issues
Date Quantity Kgs
April 4 1100
April 24 1600
May 10 1500
May 26 1700
June 15 1500
June 21 1200

There was 1500 kgs in stock as at 1 April which was valued at Rs 4.80 per kg

Issues are to be priced on the basis of weighted average method. The stock verifier
of the company reported a shortage of 80kgs on 31st May and 60kgs on 30th June.
The shortage is treated as inflating the price of remaining material on account of
shortage. You are required to prepare a stores ledger account.

30. A company is engaged in heavy engineering works on the basis of job order received
from industrial customers. The company has received a job order of making turbine
from a power generation company. Below are some details of stores receipts and
issues of copper wire used in manufacturing of turbine.

Feb 1 Opening stock 1200 kg @ Rs 475 per kg

Feb 5 Issued 975 kg to mechanical division vide material requisition no
Mec 09/13
Feb 6 Received 3500 kgs at Rs 460 per kg vide purchase order no
159/13
Feb 7 Issued 2400 kgs to electrical division vide material requisition no
Ele 012/13
Feb 9 Returned to stores 475 kgs by electrical division against material
requisition no ele 012/13
Feb 15 Received 1800 kgs at Rs 480 per kg vide PO 161/13
Feb 17 Returned to supplier 140 kgs out of quantity received vide POv
161/13
Feb 20 Issued 1900 kgs to electrical division vide material requisition no
ele 165/13

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On 28th Feb it was found that 180 kgs of wire was fraudulently misappropriated by
the stores assistant and never recovered by the company. From the above
information you are required to prepare the stock ledger account using weighted
average method of valuing the issues.

31. (RTP) A company uses a small casting in one of its finished products. The castings are
purchased from a foundry. IPL limited purchases 54000 casting per year at a cost of
Rs 800 per casting.

The castings are used evenly throughout the year in the production process on a 360
day per year basis. The company estimates that it costs Rs 9000 to place a single
purchase order and about Rs 300 to carry one casting in inventory for a year. The
high carrying costs result from the need to keep the castings in carefully controlled
temperature and humidity conditions, and from high cost of insurance.

Delivery from the foundry generally takes 6 days but it can take as much as 10 days.
The days of delivery time and % of their occurrence are shown in the following table

Delivery 6 7 8 9 10
Time days
% of 75 10 5 5 5
occurrence

1. Compute the EOQ

2. Assume that the company is willing to take a 15% risk of being out of stock. What
would be the safety stock and the reorder point
3. Assume that the company is willing to take a 5% risk of being out of stock. What
would be the safety stock and the reorder point.
4. Assume 5% stock out risk. What would be the the total cost of ordering and
carrying inventory for one year
5. Refer to the original data. Assume that using process re-engineering the
company reduces its cost of placing a purchase order to only Rs 600. In addition
the company estimates that when the waste and inefficiency caused by
inventories are considered, the true cost of carrying a unit in stock is Rs 720 per
year (a) Compute new EOQ (b) How frequently would the company be placing an
order as compared to the old purchasing policy.

32. (RTP) ABC Ltd. Distributes a wide range of water purifier systems. One of its best-
selling items is a standard water purifier. The management of ABC Ltd uses the EOQ
decision model to determine the optimal number of Standard water purifiers to
order. Management now wants to determine how much safety stock to hold.

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ABC Ltd estimates the annual demand (360 working days) to be 36,000 standard
water purifiers. Using the EOQ decision model, the company orders 3,600 standard
water purifiers at a time. The lead-time for an order is 6 days. The annual carrying
cost of one standard water purifier is Rs.450. Management has also estimated that
the additional stock-out costs would be Rs.900 for shortage of each standard water
purifier.

ABC Ltd. Has analysed the demand during 200 past re-order periods. The records
indicate the following patterns -
Demand 540 560 580 600 620 640 660 Total
during lead
time
No of times 6 12 16 130 20 10 6 200
quantity
demanded

Required:

 Determine the level of safety stock for standard water purifier that ABC Ltd
should maintain in order to minimize expected stock-out costs and carrying
costs. When computing carrying costs, assume that the safety stock is on
hand at all times and that there is no over-stocking caused by decrease in
expected demand (consider safety stock of 0, 20, 40, and 60 units.)
 What would be ABC’s new Re-Order Point?
 What factors ABC Ltd should have considered in estimating stock out costs.

33. Kumar enterprises has decided to adopt JIT policy for materials. The following effects
of JIT policy are identified –
a. To implement JIT, the company has to modify its production and material
receipt facilities at a capital cost of Rs.6,00,000. The new facilities will require
a cash operating cost of Rs.48,000 per annum.
b. Raw material stockholding will be reduced from 28,00,000 to 8,00,000
c. The company can earn 15% on its long term investments
d. The company can avoid rental expenditure on storage facilities amounting to
Rs.30,000 per annum. Property taxes and Insurance amounting to Rs.12,000
will be saved due to JIT programme.
e. Presently there are 7 workers in the stores department at a salary of Rs.3,000
each per month. After implementing JIT scheme, only 2 workers will be
required in this department. Of the balance 5 workers, 3 will be transferred
to other departments, while 2 workers employment will be terminated.

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f. Due to receipt of smaller lots of Raw materials, there will be some disruption
of production. The costs of stock out is estimated at Rs.66,000 per annum.
Determine the financial impact of JIT policy. It is advisable for the company to
implement JIT system.

34. (RTP May 2020) Arnav Electronics manufactures electronic home appliances. It
follows weighted average Cost method for inventory valuation. Following are the
data of component X:

Date Particulars Units Rate per

unit
(Rs.)
15-12-19 Purchase Order- 008 10,000 9,930
30-12-19 Purchase Order- 009 10,000 9,780
01-01-20 Opening stock 3,500 9,810
05-01-20 GRN*-008 (against the Purchase Order- 10,000 -
008)
05-01-20 MRN**-003 (against the Purchase Order- 500 -
008)
06-01-20 Material Requisition-011 3,000 -
07-01-20 Purchase Order- 010 10,000 9,750
10-01-20 Material Requisition-012 4,500 -
12-01-20 GRN-009 (against the Purchase Order- 009) 10,000 -
12-01-20 MRN-004 (against the Purchase Order- 009) 400 -
15-01-20 Material Requisition-013 2,200 -
24-01-20 Material Requisition-014 1,500 -
25-01-20 GRN-010 (against the Purchase Order- 010) 10,000 -
28-01-20 Material Requisition-015 4,000 -
31-01-20 Material Requisition-016 3,200 -
*GRN- Goods Received Note; **MRN- Material Returned Note

Based on the above data, you are required to CALCULATE:

a. Re-order level
b. Maximum stock level
c. Minimum stock level
d. PREPARE Store Ledger for the period January 2020 and DETERMINE the value of stock as
on 31-01-2020.
e. Value of components used during the month of January, 2020.
f. Inventory turnover ratio.

35. (RTP Nov 2019) HBL Limited produces product 'M' which has a quarterly demand of
20,000 units. Each product requires 3 kg. and 4 kg. of material X and Y respectively. Material
X is supplied by a local supplier and can be procured at factory stores at any time, hence,
no need to keep inventory for material X. The material Y is not locally available, it requires

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to be purchased from other states in a specially designed truck container with a capacity of
10 tons.
The cost and other information related with the materials are as follows:

Particulars Material –X Material-Y

Purchase price per kg. (excluding GST) Rs.140 Rs.640
Rate of GST 18% 18%
Freight per trip (fixed, irrespective of - Rs.28,000
quantity)
Loss of materials in transit* - 2%
Loss in process* 4% 5%

*On purchased quantity

Other information:
- The company has to pay 15% p.a. to bank for cash credit facility.
- Input credit is available on GST paid on materials.
Required:
a. CALCULATE cost per kg. of material X and Y
b. CALCULATE the Economic Order quantity for both the materials.

36. (MTP Oct 2019) A Ltd. manufactures a product X which requires two raw materials A and B
in a ratio of 1:4. The sales department has estimated a demand of 5,00,000 units for the
product for the year. To produce one unit of finished product, 4 units of material A is
required.
Stock position at the beginning of the year is as below:
Product- X 12,000 units
Material A 24,000 units
Material B 52,000 units
To place an order the company has to spend Rs.15,000. The company is financing its working
capital using a bank cash credit @13% p.a.
Product X is sold at Rs.1,040 per unit. Material A and B are purchased at Rs.150 and Rs.200
respectively.

Required:
COMPUTE economic order quantity (EOQ):
(i) If purchase order for the both materials is placed separately.
(ii) If purchase order for the both materials is not placed separately.

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