UNIT 2
PROBLEMS ON
Materials and Labour Cost Control
Problems on Economic Order Quantity:
1. From the following figures, calculate the Economic Order Quantity:
Annual Consumption of material 4,000 Kg
Cost of placing one order Rs 5
Cost per unit Rs 2 per kg
Storage and carrying cost 8% on average inventory
2. G Ltd produces a product which has a monthly 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
You are required to calculate.
I. Economic ordering quantity
II. If the minimum lot size to be supplied is 4,000 units, what is the extra cost the
company must incur?
III. What is the minimum carrying cost, the company has to incur?
3. The complete Gardener is deciding on the EOQ for two brands of lawn fertilizer: super Grow
and Nature’s own. The following information is collected:
Particulars Fertilizer
Super Grow Nature’s Own
Annual Demand 2,000 Bags 1,280 Bags
Relevant ordering cost per purchase order Rs 1,200 Rs 1,400
Annual relevant carrying cost per bag Rs480 Rs 560
Required:
I. Compute EOQ for Super Grow and Nature’s Own
II. 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?
III. For the EOQ, compute the number of deliveries per year for Super Grow and Nature’s
own.
4. From the following information calculate EOQ and the number of orders to be placed in one
quarter of the year:
I. Quarterly consumption of materials 2,000 kg
II. Cost of placing one order Rs 50
III. Cost per unit Rs 40
IV. Storage and carrying cost 8% on average inventory
5. Calculate the Economic order Quantity from the following information. Also state the number
of orders to be placed in a year:
Consumption of materials per annum 10,000 kg
Order placing costs per order Rs 50
Prepared by: Prof Sangeetha S Kumar, Assistant Professor FOCM PESU
Cost per kg of raw materials Rs 2
Storage costs 8% on average inventory
Problems on Stock Level:
6. Two components A and B are used as follows:
Minimum usage 150 units per week each
Normal usage 300 units per week each
Maximum usage 450 units per week each
Re-order Quantity A 2,400 units
B 3,600 units
Re-order Period A 4 to 6 weeks
B 2 to 4 weeks
Calculate for each component:
Re order level
Minimum level
Maximum level
Average stock level
7. Calculate the
I. Minimum stock level
II. Maximum Stock Level
III. Ordinary level from the following particulars:
a) Minimum consumption 100 units per day
b) Maximum Consumption 175 units per day
c) Normal Consumption 125 units per day
d) Re order quantity 1500 units
e) Minimum period for receiving materials 7 days
f) Maximum period for receiving materials 15 days
g) Normal period for receiving materials 10 days
8. Two components A & B are used as follows:
Normal usage 50 units per week each
Minimum usage 25 units per week each
Maximum usage 75 units per week each
Re order Quantity A: 300 units B 500 units
Re order period A: 4 to 6 weeks B: 2 to 4 weeks
Calculate for each component (a) Re order level (b) Minimum level (c ) Maximum level and (d)
Average stock level
9. In manufacturing its product, a company uses three raw materials A,B and C in respect of
which the following information is available;
Raw Usage per Re-order Price per Delivery Order Minimum
Materials unit of Quantity kg Period level level
product (kg) (paise) (weeks) (kg) (kg)
(kg)
A 10 10,000 10 1 TO 3 8,000
B 4 5,000 30 3 TO 5 4,750
C 6 10,000 15 2 TO 4 2,500
Prepared by: Prof Sangeetha S Kumar, Assistant Professor FOCM PESU
Weekly production varies from 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) Re-Order level of C and
d) Average Stock level of A
10. Calculate from the following:
i. Maximum Stock level
ii. Minimum Stock level
iii. Re-order level
Normal Usage 300 units per week
Maximum stock level 150 units per week
Maximum usage 450 units per week
Re-order quantity 1,800 units
Re-order period 2 to 4 weeks
11. From the following data for the year ended 31st Dec 2020, calculate the inventory turnover
ration of the two items, and put forward your comment on them.
Materials A Materials B
Opening stock on 1.01.2020 10,000 9,000
Purchases during the year 52,000 27,000
Closing stock on 31.12.2020 6,000 11,000
12. From the following information, Calculate (1) Re-order level (2) Maximum Stock level and (3)
Minimum tock Level:
Re-order quantity 4,000 units
Minimum stock level to allow for emergencies 5 weeks
Average delivery time from suppliers 4 weeks
Maximum stock level allowed by management 20 weeks
Average rate of consumption per week 250 units
Minimum consumption in 4 weeks 800 units
13. Determine Maximum Stock and Buffer Stock to keep stock at a reasonable level while
providing a good service where:
Maximum Average Minimum
Daily Consumption 75 units 50 units 25 units
Delivery Period 5 days 2 days 1 day
Ideal Order size = 125
RE-order Level = 375 units
14. From the following information, you are required to calculate Maximum level, Minimum level
and ordering level for materials X and Y:
X Y
Normal Usage per week 150 200
Re-Order Quantity 900 1,500
Maximum Usage per week 225 250
Minimum Usage per week 75 100
Prepared by: Prof Sangeetha S Kumar, Assistant Professor FOCM PESU
Re-order Period (weeks) 12 to 18 6 to 12
15. From the details given below, calculate:
i. Re-order Level
ii. Maximum Level
iii. Minimum Level
iv. Danger Level
Re-order quantity is to be calculated based on the following information:
Cost of placing a purchase order is Rs 20
Number of units to be purchased during the year is 5,000
Purchase price per unit inclusive of transport cost is Rs 50
Annual cost of storage per unit is Rs 5
Details of lead time: Average 10 days, Maximum 15 days, Minimum 6 days for
emergency purchases 4 days.
Rate of consumption Average 15 units per days, Maximum 20 units.
Problems on FIFO, LIFO, Simple and Weighted average:
16. The stock of material A as on 1st April 2020 is 500 units @ Re 1 per unit. Following purchases
and issues of this item were made subsequently. Prepare stores ledger a/c under FIFO and
LIFO
Date Purchases Rate Date Issues
Units
April 6 100 1.10 April 9 500
April 20 700 1.20 April 22 500
April 27 400 1.30 April 30 500
May 13 1,000 1.40 May 15 500
May 20 500 1.50 May 22 500
June 17 400 1.60 June 18 500
June 28 600 1.70 June 29 500
17. Record the following transaction pricing the materials according to (i) FIFO and (ii) LIFO. Show
the balance after each transaction and the inventory value on September 30, 2020.
July 1 Balance 1,000 units @ Re 1 per unit
July 15 Ordered 500 units, purchase order No 701. Expected July 20
July 18 Issued 250 units M.R No 251 to Department X
July 21 Received 300 units Purchase Order No 701 @ Re 1.10 per unit
July 25 Ordered 500 units, purchase Order No 725 Expected August 5
August 1 Issued 350 units, M.R No 260 to Department Y
August 10 Received 400 units, Purchase Order No 725, @ Re 1.20 per unit.
August 20 It is discovered that 10 units received on July 21, purchase Order No
September 1 701, were defective. They were returned to the Vendors.
September 15 Issued 200 units M.R No 275, to Department Z
September 20 Department Z returned to stock room for credit, 50 units which were
issued on September 15
September 30 Issued 250 units M.R No 285 to Departments X
18. Prepare the store ledger account for the month of September 2020 from the following
transactions, relating to the receipts and issue of materials on the basis of:
Prepared by: Prof Sangeetha S Kumar, Assistant Professor FOCM PESU
a) Simple Average Price
b) Weighted Average Price
Date Quantity Rate
Receipts: 200 Kgs Rs 10 per kg
4.9.2020 300 Kgs Rs 12 per kg
18.9.2020 100 Kgs Rs 16 per kg
22.9.2020
Issues:
6.9.2020 100 Kgs
20.09.2020 200 Kgs
25.09.2020 300 Kgs
19. Prepare the stores Ledger Account by using weighted average method in respect of a material
item R during the six months ended on Dec 31 2020
Month Purchases (kg) Price per Kg (Rs) Issues
July 220 2.50 250
August 250 2.40 220
September 240 2.60 200
October 220 2.30 240
November 260 2.50 210
December 200 2.275 210
The opening stock on July 1 was 240 kgs @ Rs 2.40 per kg
The closing stock on December 31st was 300 kgs @ Rs 2.30 per kg.
20. Record the following transactions in stores Ledger, pricing the materials issued by (a) FIFO (b)
LIFO ( c) Average Price Method. Show the balance of inventory after each transaction:
May 1 Balance 50 units @ 25P per unit
May 1 Ordered 200 units, expected May 6, purchase order 55
May 2 Issued 25 units, requisition No 101, Dept A
May 4 Ordered 100 units, expected May 8, purchase order 65
May 6 Received 200 units, purchase order 55 @ 30 P per unit
May 7 Issued 75 units, requisition 105, production order 313
May 8 Returned to stock room 5 units from Deptt A, requisition 101
May 10 Received 75units, Purchase order 65 @ 38P per unit
May 12 Ordered 50 units, Purchase Order 77, expected May 20
May 15 Issued 800 units, Requisition 125, Production Order 328
May 18 Received 25 units, balance of Purchase Order 65@ 38P per unit
May 21 Issued 30 units, Requisition 130, Deptt B
May 23 Returned to vendor 10 units from Purchase Order 65, received May 18
May 25 Received 50 units, Purchase Order 77 @ 25P per unit
May 27 Freight on Purchase Order 77, Rs 12
May 29 Issued 60 units, Requisition 140, Production Order 354
Prepared by: Prof Sangeetha S Kumar, Assistant Professor FOCM PESU
Problems on Labour Cost Control
21. From the following information, prepare a statement showing the cost per day of 8 hours of
engaging labour:
Monthly salary (Basic plus dearness allowance ) Rs 200
Leave salary 5%
Employer’s contribution towards Provident fund 8% of (a) and (b)
Employer’s contribution to State Insurance 21/2 % of (a) and (b)
Pro-rata expenditure on amenities to labour Rs 17.95 per head per month
No of working hours in a month 200
22. M/s Sunil enterprises supply you the following information for the year ending 31 st March
2020 for 30 workers:
Basics Wages 50,000 Recovery towards supply of
Dearness Allowances 25,000 provisions 16,000
Night Shift Allowances 9,600 Expenses incurred for amenities to
Overtime Allowance 7,000 Employees 4,730
Bonus 20% on wages
Provident Fund deposit for period 12,000
ESI Contribution 2,808
Recovery towards House rent 10,200
Provident Fund is paid in equal shares by the employer and the employees. The contribution
to ESI is in the proportion of 7: 5 by the employer and the employees respectively. The workers
are entitled to 5% of the total days worked as leave on full pay. The number of days worked
in the year is 300. Normal idle time is 5%. Assuming that all items are evenly spread over all
the days in the year, ascertain the wages-cost per hour, the daily hours worked being eight.
23. From the following details, calculate the normal and overtime wages of a work man in a cotton
mill.
Days No of hours worked
Monday 7 hours
Tuesday 8 hours
Wednesday 10 hours
Thursday 9 hours
Friday 8 hours
Saturday 5 hours
Normal working hours: 7 Hours per day; Normal rate of wages: Re 1 per hour.
Overtime wage rate: up to 8 hours in a day at single rate and over 8 hours in a day at
double rate; OR up to 42 hours in a week at a single rate and over 42 hours at double
rate whichever is more beneficial to workman.
24. The normal working week in a factory is of 44 hours. A worker is paid 50 paise an hour,
overtime is 1 and a half times the hourly rate and a bonus of 25 paise for every 100 articles
produced in excess of 5,000 articles per week. Calculate his wages for the week from the
following taken from his Time and Job Card:
Day In Out In Out Output
Monday 8.00 12.00 1.00 5.30 950
Tuesday 8.00 11.30 - - 545
Prepared by: Prof Sangeetha S Kumar, Assistant Professor FOCM PESU
Wednesday 8.30 12.00 1.00 8.00 1,106
Thursday 8.00 12.00 1.00 6.00 1,052
Friday 8.00 12.00 1.00 6.30 1,002
Saturday 8.00 12.00 1.00 7.00 1,112
25. Calculate total earnings and effective wage rate from the following information on,
a) Time Basis
b) Piece Basis
c) Halsey plan
d) Rowan Plan
Standard Time 50 hours
Actual Time Taken 40 hours
Rate of wages Re 1 per hour
Dearness Allowances 50 paise per hour worked
26. A worker takes 9 hours to complete a job on daily wages and 6 hours on a scheme of payment
by results. His day rate is 75 paise an hour, the material cost is Rs 4 and the overheads are
recovered at 150% of the direct wages. Calculate the factory cost of the product under:
a) Piece work Plan
b) Rowan Plan, and
c) Halsey Plan
27. A worker under the Halsey method of remuneration has a day rate of Rs 12 per week of 48
hours, plus a cost of living bonus 10 paise per hour worked. He is given an 8 hours task to
perform which he accomplishes in 6 hours. He is allowed 30% of the time saved as premium
bonus. What would be his total hourly rate of earnings, and what difference would it make if
he was paid under the Rowan plan?
28. The time allowed for a job is 8 hours. The hourly labour rate is Re 1. Prepare a statement,
showing the bonus earned, the total earnings for labour and hourly earnings under the Halsey-
Weir system and Rowan system of premium bonus for each hour saved progressively. Give
your comments on the comparative findings in the two systems.
29. From the following particular you are required to work out the earning of a worker for a week
under (a) Straight piece rate (b) Differential piece rate, ( c) Halsey premium scheme (50%
sharing ) and (d) Rowan premium scheme
Weekly working hours 48
Hourly wage rate Rs 7.50
Piece rate per unit Rs 3.00
Normal time taken per piece 20 minutes
Normal output per week 120 pieces
Actual output for the week 150 pieces
Differential piece rate 80% of piece rate when output below normal and
120% of piece rate when output above normal.
30. The profitability position of M/s Pioneer Industries Ltd for a year is as under:
Rs (Lakh) Rs (Lakh)
Annual Turnover 200
Variable Cost:
Direct Materials 60
Direct Labour 40
Variable Overheads 50 150
Marginal Contribution 50
Prepared by: Prof Sangeetha S Kumar, Assistant Professor FOCM PESU
Fixed Overheads 10
Profit for the year 40
The profit for the year did not match with company’s expectations and works management
attributed it to labour turnover.
Analysis of the data revealed the following:
Permanent workmen worked during the year 9,60,000 direct labour hours
Apprentice workmen worked 80,000 direct labour hours
10,40,000 direct labour hours
The effectiveness of direct labour hours put in by apprentice workmen was 50% and delay in
replacing against separations during the year resulted in loss of 20,000 direct labour hours.
Calculate the loss of profit on account of loss of production from labour turnover.
31. The three workers, Govind, Ram and Shyam, produced 80,100 and 120 pieces of a product ‘X’
on a day in May 2020 in a factory. The time allowed for 10 units of product X is 1 hour and
their hourly rate is Rs 4. Calculate for each of these three workers the following:
I. Earnings for the day, and
II. Effective Rate Earnings per hour
Under (a) Straight piece rate , (b) Halsey Premium Bonus (50% sharing ) and ( c) Rowan
Premium Bonus – methods of labour remunerations.
32. From the following particulars, you are required to work out the earnings of a worker for a
week under (a) Straight piece rate (b) Differential piece rate , ( c ) Halsey premium scheme
(50% sharing ) and (d) Rowan premium scheme.
Weekly working hours 48 Normal output per week 120 pieces
Hourly wage rate Rs 7.50 Actual output for the week 150 pieces
Piece rate per unit Rs 3.00
Normal time taken per piece 20 minutes
Differential piece rate 80% of piece rate when output below normal and
120% of piece when output above normal
33. Wage negotiations are going on with the recognised Labour union and the Management
wants you as the Cost Accountants of the Company to formulate an incentive scheme with a
view to increase productivity.
The cases of three typical workers Achyuta, Ananta and Govinda who produce respectively
180, 120 and 100 units of the company’s product in a normal day of 8 hours, are taken up the
study.
Assuming that day wages would be guaranteed at 75 paise per hour and the piece rate would
be based on a standard hourly output of 10 units, calculate the earnings of each of the three
workers and the labour cost per 100 pieces under (i) Day wages, (ii) Piece rate , (iii) Halsey
scheme and (iv) Rowan scheme.
Also calculate under the above scheme the average cost of labour for the company to produce
100 pieces .
Prepared by: Prof Sangeetha S Kumar, Assistant Professor FOCM PESU
