CA Sunil Keswani 124

Chapter 4
Material Cost
Past Exam Trend
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Pr. 10 5 10 5 10 - 5 5 5 5 - 5 5 -
Th. 7.5 5 - 5 - 5 5 5 5 5 - 5 5 -

Meaning of Material • The general meaning of material is all commodities/physical objects

supplied to an organization to be used in producing or manufacturing of
finished or intermediate goods.
• It may be classified as direct material or indirect material.

Control of Material • It starts from 3Es i.e. Economy, Efficiency and Effectiveness
• In other words, it is economy in procurement, efficiency in handling
and processing the material and effectiveness in producing desired
output as per the standard.

Importance of • Quality of final product as it depends on quality of inputs.

Material Control • Price of final product as material constitute significant part of any
product
• Production continuity depends on availability of material
• To minimize cost of stock holding and stock out
• To minimize wastage and other losses

Objective of • Minimized Cost - Material should be purchased only when it is needed

material control and in most economic quantities.
• Availability - Material of desired quality should be available when
needed to minimize interruption in production process.
• Lowest Purchase Price - Purchasing of material will be made at the
most favorable prices under the best possible terms.

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CA Sunil Keswani 125
• Minimum Investment - Investment in material is maintained at
minimum level consistent with the operating requirement.
• Material Storage - Materials are, at all the time, charged as the
responsibility of some individual.
• Reduction in Wastage - Wastage and losses while the materials are in
store should be avoided as far as possible.

Elements of Material • It involves efficient functioning of the following operations:

Control (a) Purchasing of material
(b) Receiving of material
(c) Inspection of material
(d) Storage of material
(e) Issuing material
(f) Maintenance of inventory records
(g) Stock audit

Steps involved in • Depending upon the size and nature of the operations the purchase
Purchase Procedure procedure may differ from organization to organization. However, the
main steps involved in purchasing procedure are as follows:
Step – 1→ Receipt of purchase requisition
Step – 2→ Issue of enquiry letters and tenders
Step – 3→ Finalization of quotations and placing of purchase orders on
suppliers
Step – 4→ Preparation, placement and follow up of purchase order
Step – 5→ Receipt of material
Step – 6→ Inspection of materials
Step – 7→ Return of rejected materials
Step – 8→ Checking and passing of purchase invoices for payments
Step – 9→ Making payment to supplier

Bill of Material or • It is a complete schedule of component parts and raw materials required
Material for a particular job or work order prepared by the drawing
Specification List office/production planning/engineering department along with the
necessary blue prints of drawings.
• On this basis only, purchase requisitions are prepared by the production
or maintenance department and sent to the purchase department for
procurement of materials.
• Uses of Bill of material by different departments:

Material Cost
CA Sunil Keswani 126
(a) Marketing or Purchase department – Materials are purchased
based on the specification mentioned in bill of material
(b) Production department – Production is planned based on the this
and accordingly material requisition list is prepared.
(c) Stores department – It is used as reference document while
issuing materials to different departments
(d) Cost or Accounting department – It is used to estimate cost and
profit and becomes basis for verification or comparison.

Purchase • It is a document prepared by the department requiring material to the

Requisition purchase department to purchase the materials specified therein.
• It provides for the information in respect of specification of the
materials and quantity to be purchased.
• It also gives the information as to when these materials are required.
• It is prepared by stores keeper for regular material and by the
departmental head for special materials (not stocked as regular items)

Purchase Order • It is a document prepared by the purchase department which authorizes

the supplier to supply the specified quantity of materials of specified
quality at specified price on terms specified therein and commitment
from buyer to accept and pay for the goods ordered.

Goods Receipt Note • All materials and stores received during the day are recorded by
storekeeper on Goods Received Note, which are numbered serially and
are prepared in triplicate.
• One copy of Goods Received Note is kept in store and other three copies
are sent to purchase department, accounting department and order
intending department.

Goods Inspection • Inspection department checks the quality of material received to ensure
Note that the quality of material is as per specifications stated in the purchase
order.
• After checking the quality, it prepares the inspection report to show the
results of the inspection.
• If the goods are rejected, reasons for such rejection are specified in this
report.
• The report is either prepared separately or incorporated in the goods
received note.

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CA Sunil Keswani 127
Material Requisition • It is a formal request, for the supply of specified materials, stores etc. to
Note the production departments for a specific job or work order.
• It authorizes the issuing department to draw from stores the
requisitioned materials.
• Such notes contain information about the description, code and quantity
of materials needed. It also has job/ work order number for which the
material has been requisitioned.

Material Transfer • The transfer of material from one job to another should be strictly
Note prohibited unless the procedure is adequately recorded on the Material
Transfer Note.
• This should indicate all necessary data for debiting and crediting the
concerned jobs or processes affected.
• No entry is required in Bin Card and Stores Ledger for material transfer.

Material Returned • It is prepared in case when the material is returned after its entry in the
Note receiving report and account books should be adjusted accordingly.

Duties of Store • General control over store

Keeper • Safe custody of materials
• Maintaining records
• Initiate purchase requisition
• Maintaining adequate level of stock
• Issues of materials
• Stock verification and reconciliation

Store Records • It can be prepared in three forms:

(a) Bin cards
(b) Stock control cards
(c) Stores ledger

Bin Card • Bin refers to an almirah, a rack, box, container or space where materials
are kept.
• A separate bin is maintained for each item of material and is assigned
an identification number.
• A card is tied to or placed outside each bin to record the quantity of
materials received, issued, returned and in hand in the bin.
• This card is called bin card or stock card.

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CA Sunil Keswani 128
• This card also contains particulars regarding maximum level, minimum
level, reorder level, Bin no, name and code of material, location and
stores ledger folio.

Two Bin System • Under this system each bin is divided into two parts.
• One smaller part, should stock the quantity equal to the minimum stock
or even the re-ordering level, and the other to keep the remaining
quantity.
• Issues are made out of the larger part; but as soon as it becomes
necessary to use quantity out of the smaller part of the bins fresh order
is placed.
• Two bin system is supplemental to the record of respective quantities
on the bin card and the stores ledger card.

Stock Control Cards • It is a quantitative record of inventory maintained by stores department

for every item of material.
• It shows overall inventory position in store.

Stores Ledger • It records both quantity and cost of materials received, issued and those
in stock.
• It is maintained by the cost/accounts department.

Inventory Control • Its main objective is to maintain a trade-off between stock-out and over-
stocking.
• It can be done on following basis:
(a) By setting quantitative levels
(b) On the basis of relative classification
(c) Using ratio analysis
(d) Physical control

Inventory Control • It is done by setting various levels of stock which are as follows:
by Setting (a) Re-order quantity or EOQ
Quantitative Levels (b) Re-order level
(c) Maximum level
(d) Minimum level
(e) Average level
(f) Danger level
(g) Buffer stock

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CA Sunil Keswani 129
Economic Order • If purchases of material are made in bulk then inventory carrying cost
Quantity (EOQ) or will be high.
Re-Order Quantity • If order size is small each time, then the ordering cost will be high.
• The size of the order for which both ordering and carrying cost are
minimum is known as economic order quantity
!×#×$
• Economic Order Quantity = ! %

A = Annual demand / annual consumption in units

O = Cost of placing and receiving an order
C = Carrying cost per unit per annum

Ordering Cost • These are the costs which are associated with the purchasing or ordering
of materials. It includes costs like tender invitation, transportation of
goods, inspection costs etc.

Carrying Cost • These are the costs for holding or storing goods in the stores. It includes
costs like storage, rent, insurance, spoilage, deterioration etc.

Assumptions of • Annual consumption/usage/requirement of raw material is known in

EOQ advance.
• Ordering cost per order is known and constant.
• Cost per unit of the material to be purchased is known and it is constant.
• Carrying cost is computed on average inventory ordered.
• The rate of carrying cost remains constant.
• The consumption/usage of material is expected to be even throughout
the year.

Material handling • It refers to the expenses involved in receiving, storing, issuing and
cost handling materials.
• These costs are included as part of the cost of materials either:
• at the rate of percentage of the cost of material issued or
• on the basis of weight of materials issued

Re-order Level • It is the level at which purchase manager will issue a fresh purchase
order with supplier.
• It is fixed somewhere between maximum and minimum level.
Re-order Level (ROL)
= Maximum Consumption × Maximum Re-order Period
Re-order Level (ROL)

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CA Sunil Keswani 130
= Minimum Level + (Avg. Consumption × Avg. time)
Re-order Level (ROL)
= Safety Stock + (Average Consumption × Average time)

Minimum Level • It is the lowest quantity of a particular material which must be held in
the store at all times.
• It is the level of goods at which the fresh goods ordered earlier should
reach the factory premises.
• It is fixed to avoid the cost of under-stocking and shortage.
Minimum Level
= Re-order level – (Avg. consumption × Avg. Re-order period)

Maximum Level • It is the level beyond which goods are not allowed to exceed.
• In other words, it is the largest quantity of a particular material which
may be held in the store at any time.
• It is fixed to avoid the costs of over-stocking.
Maximum Level
= Re-order Level + Re-order Quantity
– [Min. Consumption × Min. time]

Average Level or • It is the average quantity of goods held in the stores.

Normal Stock Level Average Level = (Maximum Level + Minimum Level) / 2
Average Level = Minimum Level + (Re-order Quantity)/2

Danger Level • Danger level is the level at which normal issues of the raw material
inventory are stopped and emergency issues are only made on special
requisition approved by the competent authority.
• If it is fixed below the minimum level, then it is meant for taking urgent
corrective action.
• If it is fixed above the minimum level, then it is meant for taking urgent
preventive action.
Danger Level
= Avg. Cons. × Re-order period for emergency purchases

Buffer Stock • This stock is kept for contingency and to be used in case of sudden
order.

Stock-Out • It occurs when an inventory item could not be supplied due to

insufficient stock in the store.

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CA Sunil Keswani 131
• It leads to both financial and non-financial loss to company.
• If high safety stock is maintained than it will lead to high carrying cost
whereas in case of low or zero safety stock, it will lead to high stock out
cost.
• Thus, it is a trade-off between the carrying cost and stock-out cost.

Just in Time (JIT) • It means the purchase of gods or materials such that delivery
Purchases immediately precedes their use.
• It ensures that socks are as loss as possible or at zero level.
• It is implemented by developing closer relationship with supplier.
• It is also known as demand pull or pull through system of production.

ABC Analysis • It stands for Always Better control Analysis.

• It exercises discriminating control over various items of inventory by
classifying them into different categories on the basis of value, quantity,
frequency of replacement etc.
Category % in total % in total Extent of control
value quantity
A 70% 10% Strict control through stock
levels, EOQ etc.
B 20% 20% Need based selective control
C 10% 70% Little control – Focus on
saving associated costs

Advantages of ABC • Smooth Flow - It ensures that, there should be no danger of interruption
analysis of production.
• Cost saving - The cost of placing orders, receiving goods and
maintaining stocks is minimized.
• Control by exception – Management time is saved since attention need
to be paid only to some of the items rather than all the items.
• Standardization of work – It makes much of the work systematized
on a routine basis.

FSN Analysis • It is a measure of material control to determine the slow-moving and

non-moving items to avoid the stocking of such items and consequential
loss on its disposal. FSN stands for,
F = Fast Moving items; S = Slow Moving items;
N = Non-Moving items

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CA Sunil Keswani 132
• Fast moving items are consumed very rapidly and their stocks are to be
replenished very frequently.
• Slow moving items are not frequently required or may be required once
in a quarter or so.
• Non-moving items (Dormant stock) refer to those which are not moving
temporarily but movement is expected soon.
• If non-moving items are not required then these are to be declared as
surplus and its disposal should be done by tender or auction. The loss
on disposal is treated as factory overheads.

VED analysis • It is generally used for spare parts.

• Spare parts are classified as Vital (V), Essential (E) and Desirable (D).
• The vital spares are a must for running the concern smoothly and these
must be stored adequately.
• The E type of spares are also necessary but their stocks may be kept at
low figures.
• The stocking of D type of spares may be avoided at times.
• A wrong classification of any spares will create difficulties for
production department. The classification of spares should be left to the
technical staff because they know the need, urgency and use of these
spares.

HML Inventory • It stands for High cost, Medium cost and Low cost inventory.
• In this classification is done on the basis of cost of an individual item
rather than overall basis.
• High cost inventories are given more priority whereas medium and low
cost items are given lesser priority.

Input-Output Ratio • It is the ratio of quantity of input of material required to produce actual
output.
• It enables comparison of actual consumption and standard
consumption.

Inventory Turnover • It indicates the number of times inventory has moved out of stores.
Ratio • This ratio indicates the efficiency or inefficiency with which inventories
are maintained.
• Its purpose is to ensure the blocking of only required minimum funds
in inventory.
• A high ratio indicates that goods are fast moving and vice-versa.

Material Cost
CA Sunil Keswani 133

%&'( &* +,(-./,0 1&2'3+-4 43./25 (6- 7-./&4

Inventory Turnover Ratio = %&'( &* ,8-.,5- '(&19 6-04 43./25 (6- 7-./&4
= …… times

:,;'/=&2(6'/>--9' /2 , ;-,. (@AB/C!/B!)

Also, Inventory held period = E28-2(&.; F3.2&8-. G,(/&

Periodic Inventory • It is a system in which inventory is computed whenever required on the

System basis of actual physical count/measure/weight.
• Inventory is directly calculated by applying the method of valuation of
inventories like FIFO, LIFO.
• In this system, generally losses can’t be detected at earlier stage.
• This system is simple and less expensive.

Perpetual Inventory • It is a system in which a continuous record of receipt and issue of

System materials is maintained by the stores department.
• In this system the stock control cards, bin cards and stores ledger show
the receipts, issue and balance of each item at any point of time after
each transaction.
• The stocks as per dual records namely bin card and stores ledger are
reconciled on a continuous basis.
• This system facilitates planning and control.

Continuous Stock • It is a system of physical verification of stocks of each item on

Taking continuous basis.
• The actual quantity in the bin card is compared with bin balances.
• Such verification is conducted round the year such that all items of
stocks are verified 3 to 4 times in a year.
• Any discrepancies are investigated and reported for corrective action.
• It serves as a moral check on stores staff and acts as deterrent to
dishonesty.

Treatment of
discrepancies Causes of discrepancies Treatment
between actual stock 1. Due to clerical errors (e.g. These discrepancies are rectified
and recorded stock omission to post a by passing a suitable rectifying
receipt/issue, wrong entry in the relevant records.
recording of a receipt/issue)

Material Cost
 CA Sunil Keswani 134
2. Due to normal factors The amount of these
causing losses (e.g. discrepancies is treated as part of
shrinkage, evaporation, cost either by inflating the cost
natural deterioration etc.) per unit or by treating as part of
factory overheads.
3. Due to abnormal factors (e.g. The amount of these
pilferages, fire, theft etc.) discrepancies is charged to
costing profit & loss account.
4. Due to normal factors The amount of these
causing surpluses (e.g. discrepancies is treated as
appreciation in the weight) reduction in overheads.

Specific Price • Under this method, purchases made for particular jobs are kept
Method physically separate in the store rooms and store cards are made out for
the individual purchases.
• When materials are issued for jobs, requisitions are priced at the exact
cost as recorded on the appropriate store cards or at the price purchased.
• This system is time consuming, but it is used effectively, when non-
standardized items of materials have to be purchased to meet a
customer’s specification.

First-in-first out • It assumes that items first received are the first to be issued and that the
method (FIFO) requisitions are priced at the cost at which these items were placed in
stock.
• It is suitable when prices are falling.
• Under this method, closing stock of material will be represented very
closely at current market price.

Last-in-First-out • It assumes that the last items purchased are the first to be used.
Method (LIFO) • The balance on hand is priced at the cost of the earliest purchases.
• It simply means that prices of the last purchase are used for accounting
purposes first regardless of actual material flow.
• It is suitable when prices are rising.
• Under this method, cost of materials represent the current market price.
• As per AS-2 and Ind AS-2, LIFO is not permitted.

FIFO under • When prices are rising, FIFO method may not reflect current prices in
inflationary the material issues and, therefore, charge to production is unduly low.
conditions This method therefore tends to inflate profits

Material Cost
 CA Sunil Keswani 135

LIFO under • Under LIFO method, in times of inflation, charge to production is at the
inflationary latest high price paid. This will result in lower profits and also lower tax
conditions liability.

LIFO and FIFO • In LIFO method, production is charged with current market prices and
hence pricing of the production is facilitated.
• In case of FIFO method, production is charged with old price (i.e. low
price under inflationary conditions).
• Therefore, we prefer to use LIFO method so the product cost is near to
market price.

Base Stock Method • Under this method, minimum quantity of stock is always held at a fixed
price as reserve in the stock, to meet the state of emergency if it arise.
• The material other than base stock are valued using other methods like
FIFO, LIFO etc.

Simple average • Under this method, material issues are valued at average price.
method • It is calculated by dividing the total of the prices of the materials in the
stock, from which the material to be priced could be drawn, by the
number of prices used in that total.
• This method works well when there is little variation in the purchase
prices.
• The issue price is determined as follows:
H2/( 7./1-' &* +,(-./,0' /2 '(&19
Issue Price = I3+J-. &* 73.16,'-'

Weighted Average • Under this method, quantity of material purchased during a particular
Price Method period is also taken into account.
• Under this method weighted average price is calculated by dividing the
total cost of material purchased during the accounting period, in which
the material to be priced is used, by the total quantity of material
purchased during that period.
• A new average price is calculated at the end of each period, normally a
month and is applied to all the issues in that month.

Periodic weighted average price

F&(,0 1&'( &* 73.16,'-' 43./25 (6- ,11&32(/25 7-./&4
= F&(,0 K3,2(/(; 73.16,'-4 43./25 (6- ,11&32(/25 7-./&4

Material Cost
 CA Sunil Keswani 136
Replacement Price • Replacement price is the price at which it is possible to purchase an
Method item, identical to that which is being replaced or revalued.
• Material issues are valued at replacement cost of items.
• Main objective is to make the product cost at current market price.

Realizable Price • Realizable price is the price at which the material to be issued can be
Method sold in the market.
• This price may be more or less than the original cost price.
• The stores ledger would show profit or loss in this method too.

Standard Price • A standard price will be set for each material and is applied for all the
issues in a period, normally a year.
• It is fixed after taking into account factors such as current prices,
anticipated market trends, discount available and transport charges etc.
• Standard price should not be set on a long term basis.
• It should be determined for short periods only and revised as and when
necessary.
• All receipts under this method are posted at actual prices and issues at
standard prices for each material.
• The difference between standard and actual is disposed of through price
variance account.

Inflated Price • It is a price which includes a charge designed to cover the cost of
contingencies or related costs.
• Normally, the invoice price includes the cost of freight, insurance and
taxes less discounts. Other Expenses like cost of receiving, inspection,
storing and carrying, handling of materials and losses arising out of
evaporation and breaking-up bulk etc.; are treated as production
overhead.
• Under this method, all these expenses are added to determine the cost
of issues.
• Thus, inflated price will recover the full cost of materials.

Re-use Price Method • When materials are rejected and returned to the stores then such
materials are priced at a rate different from the price paid for them
originally.
• There is no final procedure for valuing use of material.

Material Cost
CA Sunil Keswani 137
Treatment of Item How to record in Stores Ledger
material returned & 1. Materials Such returns should be entered in the issue
shortage in stores returned by column and valued at the store ledger price
ledger stores to vendor which includes freight, receiving and
handling charges etc.
Note: In practice such returns are valued at
invoice price only and the difference between
the store ledger price and invoice price is
charged as overheads.
2. Materials There are two ways of treating such returns:
returned to (a) Such returns are entered in the receipt
stores column at the price at which they were
originally issued, and the materials are
kept in suspense, to be issued at the same
price against the next requisition.
(b) Such returns are entered in the receipt
column as if they were fresh purchases at
the original issue price.
3. Shortages Shortages of materials found during physical
during physical verifications should be entered in the issue
verifications column and valued at the rate as per the
method adopted, i.e. FIFO or any other.

Waste • It represents the portion of basic raw materials lost in processing having
no recoverable value.
• Waste may be visible—remnants of basic raw materials—or invisible,
e.g. disappearance of basic raw materials through evaporation, smoke
etc.
• Loss on normal wastage is usually charged to production by inflating
the unit price of material used in such a way that total cost is recovered
out of the smaller quantity actually used, whereas abnormal waste is
transferred to the Costing Profit and Loss Account.

Scrap • It has been defined as the incidental residue from certain types of
manufacture, usually of small amount and low value, recoverable
without further processing.
• Accounting Treatment:

Material Cost
 CA Sunil Keswani 138
• Where the value of scrap is negligible, it may be excluded from
costs.
• The sales value of scrap is deducted from overhead to reduce the
overhead rate.
• If scrap is identifiable with a particular job or process and its value
is significant than credit is given to the job or process concerned.
• Scrap due to abnormal reasons will be transferred to the Costing
P&L Account.

Spoilage • It is the term used for materials which are badly damaged in
manufacturing operations, and they cannot be rectified economically
and hence taken out of process to be disposed off in some manner
without further processing.
• It involves not only the loss of material but also of labour and overheads
incurred upto the stage where the spoilage has occurred.
• Normal spoilage costs are included in costs either by charging the loss
due to spoilage to the production order or charging it to production
overhead.
• Abnormal spoilages are charged to the Costing Profit and Loss
Account.

Defective • It represents unit of output which fail to comply with a set quality
Work/Rejects standard and are subsequently rectified, sold as sub-standard or disposal
as scrap.
• Defective work may be due to various factors like poor quality of
materials, incompetent supervision etc.
• Accounting Treatment:
• If defective work has a nominal value, the loss is completely
absorbed by good units.
• Alternatively, the cost of defective work can be charged as general
factory overhead.
• Alternatively, cost of defective work is charged directly to
departments responsible for it.
• The cost of defective work due to abnormal reasons shall be
charged to the Costing P&L Account.

Rectification • It means bringing back the defective units either to standard units of
production or as seconds, by reworking.

Material Cost
 CA Sunil Keswani 139
• The work of rectification in small concerns is usually entrusted to the
production shop, whereas in big concerns, a separate department carries
out the task.
• The task of rectification is usually carried out under a ‘Rectification
Work Order’.
• Accounting Treatment:
• If it is due to normal consequences than it is charged to the jobs.
• If it is due abnormal reasons then it is charged to Costing P&L
Account.

Obsolescence • It is the loss in the intrinsic value of an asset due to its supersession or
technological advancements.
• The loss arising out of obsolete materials is an abnormal loss and thus
should be transferred to costing P&L.

Question – 1 [Nov19]
Define Inventory Control and give its objectives. List down the basis to be adopted for Inventory
Control.
Answer
The Chartered Institute of Management Accountants (CIMA) defines Inventory Control as “The
function of ensuring that sufficient goods are retained in stock to meet all requirements without
carrying unnecessarily large stocks.”

The objective of inventory control is to make a balance between sufficient stock and over- stock. The
stock maintained should be sufficient to meet the production requirements so that uninterrupted
production flow can be maintained. Insufficient stock not only pause the production but also cause a
loss of revenue and goodwill. On the other hand, Inventory requires some funds for purchase, storage,
maintenance of materials with a risk of obsolescence, pilferage etc. A trade-off between Stock-out and
Over-stocking is required. The management may employ various methods of Inventory control to have
a balance. Management may adopt the following basis for Inventory control:
(a) By setting quantitative levels
(b) On the basis of relative classification
(c) Using ratio analysis
(d) Physical control

Material Cost
 CA Sunil Keswani 140
Question – 2 [Jan21]
State how the following items are treated in arriving at the value of cost of material purchased:
(i) Detention Charges/Fines
(ii) Demurrage
(iii) Cost of Returnable containers
(iv) Central Goods and Service Tax (CGST)
(v) Shortage due to abnormal reasons.
Answer
S. No. Items Treatment
(i) Detention charges/Fines Detention charges/ fines imposed for non-compliance
of rule or law by any statutory authority. It is an
abnormal cost and not included with cost of purchase.
(ii) Demurrage Demurrage is a penalty imposed by the transporter for
delay in uploading or offloading of materials. It is an
abnormal cost and not included with cost of purchase.
(iii) Cost of returnable container If the containers are returned and their costs are
refunded, then cost of containers should not be
considered in the cost of purchase.

If the amount of refund on returning the container is

less than the amount paid, then, only the short fall is
added with the cost of purchase.
(iv) Central Goods and Service Central Goods and Service Tax (CGST) is paid on
Tax (CGST) manufacture and supply of goods and collected from
the buyer. It is excluded from the cost of purchase if
the input credit is available for the same. Unless
mentioned specifically CGST is not added with the
cost of purchase.
(v) Shortage due to abnormal loss Shortage arises due to abnormal reasons such as
material mishandling, pilferage, or due to any
avoidable reasons are not absorbed by the good units.
Losses due to abnormal reasons are debited to costing
profit and loss account.

Question – 3 [May22]
Write down the treatment of following items associated with purchase of materials.
(i) Cash discount
(ii) IGST
(iii) Demurrage
(iv) Shortage

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 CA Sunil Keswani 141
(v) Basic Custom Duty
Answer
S. No. Items Treatment
(i) Cash Discount Cash discount is not deducted from the purchase price.
It is treated as interest and finance charges. It is
ignored.
(ii) IGST Integrated Goods and Service Tax (IGST) is paid on
inter-state supply of goods and provision of services
and collected from the buyers. It is excluded from the
cost of purchase if credit for the same is available.
Unless mentioned specifically it should not form part
of cost of purchase.
(iii) Demurrage Demurrage is a penalty imposed by the transporter for
delay in uploading or offloading of materials. It is an
abnormal cost and not included with cost of purchase
(iv) Shortage Shortage due to normal reasons: Good units
absorb the cost of shortage due to normal reasons.
Losses due to breaking of bulk, evaporation, or due to
any unavoidable conditions etc. are the reasons of
normal loss.

Shortage due to abnormal reasons: Shortage arises

due to abnormal reasons such as material mishandling,
pilferage, or due to any avoidable reasons are not
absorbed by the good units. Losses due to abnormal
reasons are debited to costing profit and loss account.
(v) Basic Custom Duty Basic Custom duty is paid on import of goods from
outside India. It is added with the purchase cost.

Question – 4 [MTP - Nov22]

Brief the treatment of following while calculating purchase cost of material.
Trade discount, Cash discount, Penalty, Insurance charges, Commission paid
Answer
Items Treatment
Trade Discount Trade discount is deducted from the purchase price if it is not
shown as deduction in the invoice.
Cash discount Cash discount is not deducted from the purchase price. It is
treated as interest and finance charges. It is ignored.
Penalty Penalty of any type is not included with the cost of purchase

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 CA Sunil Keswani 142
Insurance charges Insurance charges are paid for protecting goods during transit. It
is added with the cost of purchase.
Commission paid Commission or brokerage paid is added with the cost of
purchase.

Question – 5 [Dec21]
What is Bill of Material? Describe the uses of Bill of Material in following departments:
(i) Purchases Department
(ii) Production Department
(iii) Stores Department
(iv) Cost/Accounting Department
Answer
Bill of Material: It is a detailed list specifying the standard quantities and qualities of materials and
components required for producing a product or carrying out of any job.

Uses of Bill of Material in different department:

Department Usage
Purchase Department Materials are procured (purchased) on the basis of specifications
mentioned in it.
Production Department Production is planned according to the nature, volume of the
materials required to be used. Accordingly, material requisition
lists are prepared.
Stores Department It is used as a reference document while issuing materials to the
requisitioning department.
Cost Accounting Department It is used to estimate cost and profit. Any purchase, issue and
usage is compared/verified against this document.

Question – 6 [MTP – Nov19, Oct20]

Distinguish between Bill of Material and Material Requisition Note.
Answer
S. No. Bills of Material Material Requisition Note
1 It is document or list of material prepared by It is prepared by the foreman of the
the engineering/drawing department. consuming department.
2 It is a complete schedule of component parts It is a department authorizing Store-keeper
and raw materials required for a particular to issue material to be consuming
job or work order. department.
3 It often serves the purpose of a Store It cannot replace a bill of material.
Requisition as it shows the complete
schedule of materials required for a

Material Cost
 CA Sunil Keswani 143
particular job i.e. it can replace stores
requisition.
4 It can be used for the purpose of quotation. It is useful in arriving historical cost only.
5 It helps in keeping a quantitative control on It shows the material actually drawn from
materials drawn through Stores Requisition. stores.

Question – 7 [MTP – May22]

Distinguish between Bin card and Stores ledger.
Answer
S. No. Bin Card Stores Ledger
1 It is maintained by the storekeeper in the It is maintained in cost accounting
store. department.
2 It contains only quantitative details of It contains information both in quantity and
material received, issued and returned to value.
stores.
3 Entries are made when transaction takes It is always posted after the transaction.
place.
4 Each transaction is individually posted. Transactions may be summarized and then
posted.
5 Inter-department transfers do not appear in Material transfers from one job to another
Bin Card job are recorded for costing purpose.

Question – 8 [May18, Nov22]

Explain 'Just In Time' (JIT) approach of inventory management.
OR
Which system of inventory management is known as 'Demand pull' or 'Pull through' system of
production? Explain. Also, specify the two principles on which this system is based.
Answer
JIT is a system of inventory management with an approach to have zero inventories in stores.
According to this approach material should only be purchased when it is actually required for
production.
JIT is based on two principles
(i) Produce goods only when it is required and
(ii) the products should be delivered to customers at the time only when they want.

It is also known as ‘Demand pull’ or ‘Pull through’ system of production. In this system, production
process actually starts after the order for the products is received. Based on the demand, production
process starts and the requirement for raw materials is sent to the purchase department for purchase.

Material Cost
 CA Sunil Keswani 144
Question – 9 [July21]
Write a short note on VED analysis of Inventory Control.
Answer
Under this system of inventory analysis, inventories are classified on the basis of its criticality for the
production function and final product. Generally, this classification is done for spare parts which are
used for production.

(i) Vital- Items are classified as vital when its unavailability can interrupt the production process
and cause a production loss. Items under this category are strictly controlled by setting re-order
level.
(ii) Essential- Items under this category are essential but not vital. The unavailability may cause
sub standardisation and loss of efficiency in production process. Items under this category are
reviewed periodically and get the second priority.
(iii) Desirable- Items under this category are optional in nature; unavailability does not cause any
production or efficiency loss.

Question – 10 [MTP – Jan25]

You are managing the inventory for a manufacturing company and notice that certain items in the
store are not being utilized frequently, leading to increased holding costs. How would you identify
slow- moving and non-moving items, and what strategies would you implement to minimize such
stocks effectively?
Answer
The existence of slow moving and non-moving item of stores can be detected in the following ways.
(i) By preparing and perusing periodic reports showing the status of different items or stores.
(ii) By calculating the inventory turnover period of various items in terms of number of days/ months
of consumption.
(iii) By computing inventory turnover ratio periodically, relating to the issues as a percentage of
average stock held.
(iv) By implementing the use of a well-designed information system.

Necessary steps to reduce stock of slow moving and non-moving item of stores:
(i) Proper procedure and guidelines should be laid down for the disposal of non-moving items,
before they further deteriorate in value.
(ii) Diversify production to use up such materials.
(iii) Use these materials as substitute, in place of other materials.

Question – 11 [Nov18]
Explain obsolescence and circumstances under which materials become obsolete. State the steps to
be taken for its treatment.

Material Cost
 CA Sunil Keswani 145
Answer
Obsolescence is defined as “the loss in the intrinsic value of an asset due to its supersession”. Materials
may become obsolete under any of the following circumstances:
(i) where it is a spare part, or a component of a machinery used in manufacture and that machinery
becomes obsolete;
(ii) where it is used in the manufacture of a product which has become obsolete;
(iii) where the material itself is replaced by another material due to either improved quality or fall in
price.
Treatment: In all three cases, the value of the obsolete material held in stock is a total loss and
immediate steps should be taken to dispose it off at the best available price. The loss arising out of
obsolete materials on abnormal loss does not form part of the cost of manufacture.

Question – 12 [May24]
Distinguish between Waste and Scrap. Discuss the treatment of normal and abnormal scrap in Cost
Accounts.
Answer
S. No. Waste Scrap
1. The portion of raw material which is lost The output which is discarded and disposed
during storage/production and discarded. off without further treatment.
2. It is connected with raw material or inputs It is the loss connected with output.
to the production process.
3. Waste of materials may be visible or Scraps are generally identifiable and has
invisible. physical substance.
4. Generally, waste has no recoverable value. Scraps are termed as by-products and has
small recoverable value.

Treatment of Scrap
Normal- The cost of scrap is borne by good units and income arises on account of realizable value is
deducted from the cost.
Abnormal- The scrap account should be charged with full cost. The credit is given to the job or
process concerned. The profit or loss in the scrap account, on realization, will be transferred to the
Costing Profit and Loss Account.

Question – 13 [May18]
Explain FIFO and LIFO method of stores issue.
Answer
First-in First-out (FIFO) method: It is a method of pricing the issues of materials, in the order in
which they are purchased. In other words, the materials are issued in the order in which they arrive in
the store or the items longest in stock are issued first. Thus, each issue of material only recovers the
purchase price which does not reflect the current market price. This method is considered suitable in

Material Cost
 CA Sunil Keswani 146
times of falling price because the material cost charged to production will be high while the
replacement cost of materials will be low.

Last-in-First-out (LIFO) method: It is a method of pricing the issues of materials. This method is
based on the assumption that the items of the last batch (lot) purchased are the first to be issued.
Therefore, under this method the prices of the last batch (lot) are used for pricing the issues, until it is
exhausted, and so on. If, however, the quantity of issue is more than the quantity of the latest lot than
earlier (lot) and its price will also be taken into consideration. During inflationary period or period of
rising prices, the use of LIFO would help to ensure that the cost of production determined on the above
basis is approximately the current one.

Question – 14 [Nov23]
State with reasons whether the following independent statements are true or false:
(i) Under LIFO method, in the period of falling prices, lower income is reported and income-tax
liability is reduced.
(ii) Under VED analysis, inventories are classified on the basis of cost of individual items.
(iii) Material requisition note is prepared by the store keeper.
(iv) Simple average pricing method is suitable when quantity purchased under each lot is
different and prices fluctuate considerably.
(v) Bin card and stores ledger are maintained by the purchasing department.
Answer
S. No. True/False Reason
(i) False Under LIFO method, in case of falling prices profit tends to rise due to
lower material cost, thus income tax liability is increased.
(ii) False Under VED Analysis, inventories are classified on the basis of its
criticality for the production function and final product.
(iii) False Material Requisition Note is prepared by the production or other
consuming department. It is a voucher used to get material issued from
store.
(iv) False Simple average pricing method is suitable when the materials are received
in uniform lots of similar quantity, and prices do not fluctuate
considerably.
(v) False Bin card is maintained by the storekeeper in the store. While Stores ledger
is maintained in cost accounting department.

Material Cost
 CA Sunil Keswani 147

Question – 1 [SM]
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 cost per order : `50
Cost per kg of raw materials : `2
Storage costs : 8% on average inventory
[Answer – 2,500 kg]

Question – 2
A wholesaler supplies 30 stuffed dolls each weekday to various shops. Dolls are purchased from the
manufacturer in lots of 120 each of `1200 per lot.

Every order incurs a handling charge of `60 plus a freight charge of `250 per lot. Multiple and
fractional lots also can be ordered and all orders are filled the next day. The incremental cost is `0.60
per year to store a doll in inventory. The wholesaler finances inventory investments by paying its
holding company 2% monthly for borrowed funds.

How many dolls should be ordered, at a time in order to minimize the total annual inventory cost?
Assume that there are 250 weekdays in a year. How frequently he should order?
[Answer – 7 orders; 1.71 months]

Question – 3
A manufacturer buys certain equipment from outside suppliers at `20 per unit. Total annual needs are
900 units. The further data are available:
Annual return of investment 10%
Rent, Taxes, insurance per unit per year `2
Cost of placing an order `200
Determine the economic order quantity.
[Answer – 300 units]

Question – 4 [SM]
(i) Compute EOQ and total variable cost for the following:
Annual Demand = 5,000 units
Unit price = `20
Order cost = `16

Material Cost
 CA Sunil Keswani 148
Storage cost = 2% per annum
Interest rate = 12% per annum
Obsolescence rate = 6% per annum
(ii) Determine the total cost that would result for the items if a new price of `12.80 is used.
[Answer – (i) 200 units; `1,00,800; (ii) `64,640]

Question – 5
SK Ltd. has received an offer of quantity discounts on its order of materials as under:
Tons (No.) Price per tons (`)
Less than 250 6.00
250 and less than 800 5.90
800 and less than 2,000 5.80
2,000 and less than 4,000 5.70
4,000 and above 5.60
The annual requirement for the materials is 4,000 tons. The ordering cost per order is `6 and the
carrying cost is estimated at 20% per annum. You are required to compute the most Economic Order
Quantity presenting the relevant information in a tabular form.
[Answer – Order size of 800 units]

Question – 6 [SM]
A company manufactures a special product which requires a component ‘Alpha’. The following
particulars are collected for the year 2020:
(i) Annual demand of Alpha 8,000 units
(ii) Cost of placing an order `200 per order
(iii) Cost per unit of Alpha `400
(iv) Carrying cost p.a. 20%
The company has been offered a quantity discount of 4% on the purchase of ‘Alpha’ provided the
order size is 4,000 components at a time.
Required:
(i) Compute the economic order quantity
(ii) State whether the quantity discount offer can be accepted.
[Answer – (i) 200 units; (ii) Not to be accepted]

Question – 7 [RTP – May23] [MTP – July20]

A company manufactures a product from a raw material which is purchased at `60 per kg. The
company incurs a handling cost of `360 plus freight of `390 per order. The incremental carrying cost
of inventory of raw material is `0.50 per kg per month. In addition, the cost of working capital finance
on the investment in inventory of raw material is `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.

Material Cost
 CA Sunil Keswani 149
Required:
(a) Calculate the economic order quantity of raw material
(b) Advise, how frequently should orders for procurement be placed. (Assuming 360days in the year)
(c) 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?
[Answer – (a) 2,00 kg; (b) 18 days; (c) 2%]

Question – 8
SK Ltd. which manufactures a product ‘S’ provides you the following information:
Monthly demand of ‘S’ = 900 units
Cost of placing an order = `75
Carrying cost per unit p.m. = 2%
Cost of input to be purchased = `50 per kg
Output per kg of input = 1.5 units
Required:
(a) What percentage of discount in the price of input should be negotiated if the company proposes to
rationalize placements of orders on monthly basis?
(b) Suppose the company followed the policy of economic order quantity and at the end of the year,
it was found that the cost of placing an order was `108 instead of `75 and all other estimates
were correct. What is the difference in cost on account of this error?
[Answer – (a) 0.24%; (b) `72]

Question – 9 [RTP – Nov19]

SK Limited produces product ‘S’ which has a quarterly demand of 20,000 units. Each product requires
3kg and 4kg of material K and M respectively. Material K is supplied by a local supplier and can be
procured at factory stores at any time, hence, no need to keep inventory for material K. The material
M is not locally available, it requires 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-K Material-M
Purchase price per kg (excluding GST) `140 `640
Rate of GST 18% 18%
Freight per trip (fixed, irrespective of quantity) - `28,000
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:

Material Cost
 CA Sunil Keswani 150
(a) Calculate cost per kg of material K and M
(b) Calculate the economic order quantity for both the materials
[Answer – (a) `145.83; `691.23; (b) 0 kg; 13,632.62 kg]

Question – 10 [MTP – Nov19]

SK Ltd. manufactures a product S which requires two raw materials P and M 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 P is required.

Stock position at the beginning of the year is as below:

Product SK 12,000 units
Material P 24,000 units
Material M 52,000 units

To place an order the company has to spend `15,000. The company is financing its working capital
using a bank cash credit @ 13% p.a.

Product SK is sold at `1,040 per unit. Material P and M are purchased at `150 and `200 respectively.
Required: Compute economic order quantity (EOQ):
(a) If purchase order for both materials is placed separately
(b) If purchase order for both materials is not placed separately
[Answer – (a) 54,462 units; 94,600 units; (b) 21,592 units; 86,860 units]

Question – 11
SK Ltd. manufacturers of a special product, follows the policy of EOQ (Economic Order Quantity)
for one of its components. The components details are as follows:
Purchase price per component `200
Cost of an order `100
Annual cost of carrying unit in Inventory 10% of purchase price
Total cost of carrying and ordering per annum `4,000
The company has been offered a discount of 2% on the price of the component provided the lot size
is 2,000 components at a time.
You are required to:
(a) Compute the EOQ
(b) Advise whether the quantity discount offer can be accepted
(c) Would your advice differ if the company is offered 5% discount on a single order?
(Assume that the inventory carrying cost does not vary according to discount policy)
[Answer – (a) 200 units; (b) Not to accept offer; (c) Accept the offer]

Material Cost
 CA Sunil Keswani 151
Question – 12 [SM]
Two components, A and B are used as follows:
Normal usage 50 per week each
Maximum usage 75 per week each
Minimum usage 25 per week each
Re-order quantity A:300; B:500
Re-order period A: 4 to 6 weeks
B: 2 to 4 weeks
Calculate for each component (a) Re-ordering level, (b) Minimum level, (c) Maximum level and (d)
Average level
[Answer – (a) 450 units; 300 units; (b) 200 units; 150 units; (c) 650 units; 750 units; (d) 425
units; 450 units]

Question – 13 [SM]
From the details given below, calculate:
(i) Re-ordering level
(ii) Maximum level
(iii) Minimum level
(iv) Danger level
Re-ordering quantity is to be calculated on the basis of following information:
Cost of placing a purchase order is `20.
Number of units to be purchased during the year is 5,000
Purchase price per unit inclusive of transportation cost is `50.
Annual cost of storage per unit is `5.
Details of lead time: Average – 10 days, Maximum- 15 days, Minimum- 5 days
For emergency purchase – 4 days
Rate of consumption: Average- 15 units per day
Maximum- 20 units per day
[Answer – (i) 300 units; (ii) 450 units; (iii) 150 units; (iv) 60 units]

Question – 14
M/s SK Ltd. are the manufacturers of picture tubes for T.V. The following are the details of their
operation during the year:
Average monthly market demand 2,000 tubes
Ordering cost `100 per order
Inventory carrying cost 20% per annum
Cost of tubes `500 per tube
Normal usage 100 tubes per week
Minimum usage 50 tubes per week
Maximum usage 200 tubes per week

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 CA Sunil Keswani 152
Lead time to supply 6-8 weeks
Compute the following from the above information:
(a) Economic order quantity. If the supplier is willing to supply quarterly 1,500 units at a discount of
5%, is it worth accepting?
(b) Maximum level of stock
(c) Minimum level of stock
(d) Reorder level
[Answer – (a) 102 tubes; Accept the offer (b) 1,600 tubes; (c) 900 tubes; (d) 1,402 tubes]

Question – 15
A company buys in lots of 6,250 units which is a 3 month’s supply. The cost per unit is `2.40. Each
order costs `45 and inventory carrying cost is 15% of average inventory value.
Required:
(a) What is the total annual cost of existing inventory policy?
(b) How much money could be saved by employing the economic order quantity?
(c) If the company operates 250 days a year, the procurement time is 10 days and safety stock is
500 units. Find the reorder level, maximum level, minimum level and average inventory level.
[Answer – (a) `61,305; (b) `405; (c) 1,500 units; 3,000 units; 500 units; 1,750 units]

Question – 16 [RTP – May19]

Ananya Ltd. produces a product ‘Exe’ using a raw material Dee. To produce one unit of Exe, 2 kg of
Dee is required. As per the sales forecast conducted by the company, it will able to sale 10,000 units
of Exe in the coming year. The following is the information regarding the raw material S:
(i) The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 20 kg. more than the average consumption per day.
(iii) There is an opening stock of 1,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is `125 per kg.
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 company has to incur `720 on paper and documentation work.
From the above information find out the followings in relation to raw material S:
(a) Re-order Quantity
(b) Maximum Stock level
(c) Minimum Stock level
(d) Calculate the impact on the profitability of the company by not ordering the EOQ.
[Take 364 days for a year]
[Answer – (a) 1,000 kg; (b) 1,440 kg; (c) 260 kg; (d) `440]

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 CA Sunil Keswani 153
Question – 17 [RTP – May18]
SK Ltd. supplies surgical gloves to nursing homes and polyclinics in the city. These surgical gloves
are sold in pack of 10 pairs at price of `250 per pack.

For the month of November 2018, it has been anticipated that a demand for 60,000 packs of surgical
gloves will arise. Aditya Brothers purchases these gloves from the manufacturer at `228 per pack
within a 4 to 6 days lead time. The ordering and related cost is `240 per order. The storage cost is
10% p.a. of average inventory investment.
Required:
(a) Calculated the Economic Order Quantity (EOQ)
(b) Calculate the number of orders needed every year
(c) Calculate the total cost of ordering and storage of the surgical gloves.
(d) Determine when should the next order to be placed. (Assuming that the company does not
maintain a safety stock and that the present inventory level is 10,033 packs with a year of 360
working days).
[Answer – (a) 3,893 packets; (b) 185 orders; (c) `88,780; (d) Immediately]

Question – 18 [RTP – Similar May24]

SK, a small scale manufacturer, produces a product S by using two raw materials K and M in the ratio
of 3:2. Material K is perishable in nature and if not used within 5 days of purchase it becomes obsolete.
Material M is durable in nature and can be used even after one year. The company has estimated a
sales volume of 30,000 kg. for the month of October and expects that the trend will continue for the
entire year. The ratio of input and output is 5:3. The purchase price of per kilogram of raw material K
and M is `15 and `22 respectively exclusive of taxes. Material K can be purchased from the local
market within I to 2 days period. On the other hand, Material M is purchased from neighboring state
and it takes 2 to 4 days to receive the material in the store.

To place an order the company has to incur an administrative cost of `120. Carrying cost for Material
K and M is 15% and 5% respectively.

At present Material K is purchased in a lot of 8,000 kg. to avail 10% discount on market price. SGST
& CGST applicable for material K is 4% (credit available) and IGST on Material M is 2% (credit not
available). Company works for 25 days in a month and production is carried out evenly.

You are required to calculate:

(a) Economic Order Quantity (EOQ) for each material;
(b) Maximum stock level for Material K;
(c) Calculate saving/loss in Material K if purchase quantity equals to EOQ.
[Answer – (a) 6,197 kg; 71,65 kg; (b) 6,000 kg; (c) `9,03,828]

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 CA Sunil Keswani 154
Question – 19
A company has the option to procure a particular material from two sources:
Source I – assures that defectives will not be more than 2% of supplied quantity
Source II does not give any assurance, but on the basis of past experience of supplies received, it
is observed that defective percentage is 2.8%

The material is supplied in lots of 1,000. Source II supplies the lot at a price, which is lower by `100
as compared to Source I. The defective units of material can be rectified for use at a cost of `5 per
unit. You are required to find out which of the two source is more economical.
[Answer – Source-II]

Question – 20 [July21]
MM Ltd. has provided the following information about the items in its inventory.
Item Code Number Units Unit Cost (`)
101 25 50
102 300 01
103 50 80
104 75 08
105 225 02
106 75 12
MM ltd. has adopted the policy of classifying the items constituting 15% or above to Total Inventory
Cost as “A” category, items constituting 6% or less of Total Inventory Cost as “C” category and the
remaining items as “B” category.
You are required to:
(i) Rank the items on the basis of % of Total Inventory Cost.
(ii) Classify the items into A, B and C categories as per ABC analysis of Inventory Control adopted
by MM Ltd.
[Answer – (i) II; VI; I; IV; V; III; (ii) A; C; A; B; C; B]

Question – 21
Compute the materials turnover ratio for materials S and K and comment upon the results.
Material S Material K
Opening stock 25,000 87,500
Purchases during the year 1,90,000 1,25,000
Closing stock 15,000 62,500
[Answer – 10 times; 2 times]

Question – 22
The following data are available in respect of material X for the year ended 31st March, 2021.

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 CA Sunil Keswani 155
Opening stock `90,000
Purchases during the year `2,70,000
Closing stock `1,10,000
Calculate:
(i) Inventory turnover ratio, and
(ii) The number of days for which the average inventory is held.
[Answer – (i) 2.5 times; (ii) 146 days]

Question – 23
Raw material ‘S’ costing `150 per kg and ‘K’ costing `90 per kg are mixed in equal proportions for
making product ‘M’. The loss of material in processing works out to 25% of the product. The
production expenses are allocated at 40% of direct material cost. The end product is priced with a
margin of 20% over the total cost.

Material ‘K is not easily available and substitute raw material ‘P’ has been found for ‘K’ costing `75
per kg. It is required to keep the proportion of this substitute material in the mixture as low as possible
and at the same time maintain the selling price of the end product at existing level and ensure the same
quantum of profit as at present.

You are required to compute the ratio of the mix of the raw material ‘S’ and ‘P’.
[Answer – 3:2]

Question – 24 [SM]
At what price per unit would S entered in the stores ledger, if the following invoice was received from
a supplier?
Invoice `
200 units S @ `5 1,000
Less: 20% discount 200
800
Add: IGST @ 12% 96
896
Add: Packing charges (non-returnable boxes) 50
946
Notes: (a) A 2% discount will be given for payment in 30 days
(b) Documents for claiming input credit are available.
[Answer - `4.25]

Question – 25 [RTP – May22] [MTP – Similar May24]

SK Ltd., not registered under GST, purchased material S from a company which is registered under
GST. The following information is available for the one lot of 1,000 units of material purchased:

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 CA Sunil Keswani 156
List price of one lot `50,000
Trade discount @10% on listed price
CGST and SGST (Credit not available) @12% (CGST 6% & SGST 6%)
Cash discount @10%
(will be given only if payment is made within 30 days)
Freight and Insurance `3,400
Toll tax paid `1,000
Demurrage `1,000
Commission on brokerage on purchases `2,000
Amount deposited for returnable containers `6,000
Amount of refund on returning containers `4,000
Other expenses @2% of total cost
20% of material shortage is due to normal reasons.
The payment to the supplier was made within 20 days of the purchases
You are required to calculate cost per unit of material purchased to SK Ltd.
[Answer - `75]

Question – 26
A manufacturer of Surat purchased three chemicals S, K and M from Delhi. The invoice provides the
following information:
`
Chemical S : 3,000 kg at `4.20 per kg 12,600
Chemical K : 5,000 kg at `3.80 per kg 19,000
Chemical M : 2,000 kg at `4.75 per kg 9,500
CGST & SGST 2,055
Railways freight 1,000
Total cost 44,155
A shortage of 200 kg in chemical S, 280 kg in chemical K and 100 kg in chemical M was noticed due
to normal breakages. The manufacturer paid cartage of `22 for chemical S, `63 for chemical K and
`32 for chemical M. Calculate the stock rate that you suggest for pricing issue of chemicals assuming
a provision of 5% towards further deterioration.
[Answer - `5.09; `4.57; `5.65]

Question – 27
SK Ltd. has projected the following for a product S.
Annual Requirement 10,400 units
Economic Order Quantity 1,040 units
Expected usage per week 200 units
Re-order period 2 weeks

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 CA Sunil Keswani 157
The probability distribution of usage of S over a two week period is as follows:

Usage (Units) 150 250 310 400 460 500 560

Probability .05 .05 .10 .50 .10 .15 .05
The stock out cost is `4 per unit and carrying cost of `5.2 per unit per annum. Calculate Safety Stock
and Re-order point.
[Answer – Safety stock 100 units and ROL 500 units]

Question – 28
SK Ltd. uses a small casting in one of its finished products. The castings are purchased from a foundry.
SK limited purchases 54,000 castings per year at a cost of `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 `9,000 to place a single purchase order and about `300 to carry one casting in
inventory for a year. The high carrying costs results from the need to keep the castings in carefully
controlled temperature and humidity conditions, and from the high cost of insurance.

Delivery from the foundry generally takes 6 days, but it can take as much as 10 days. The days of
delivery time and percentage of their occurrence are shown in the following tabulation.
Delivery time (days): 6 7 8 9 10
Percentage of occurrence: 75 10 5 5 5

Required:
(a) Compute the economic order quantity (EOQ)
(b) Assume the company is willing to assume a 15% risk of being out of stock. What would be the
safety stock? The re-order point?
(c) Assume the company is willing to assume a 5% risk of being out of stock. What would be the
safety stock? The re-order point?
(d) Assume 5% stock-out risk. What would be the total cost of ordering and carrying inventory for
one year?
(e) Refer to the original data. Assume that using process re-engineering the company reduces its
cost of placing a purchase order to only `600. In addition, company estimates that when the
waste and inefficiency caused by inventories are considered, the true costs of carrying a unit in
stock is `720 per year.
(i) Compute the new EOQ
(ii) How frequently would the company be placing an order, as compared to the old purchasing
policy?
[Answer – (a) 1,800 units; (b) 150 units; 1,050 units; (c) 450 units; 1,350 units; (d) `6,75,000; (e)
(i) 300 units; (ii) 12 days; 2 days]

Material Cost
 CA Sunil Keswani 158
Question – 29
From the following data, prepare store ledger for the month of April using (a) FIFO; (b) LIFO; (c)
Weighted Average;
1 April Opening balance 50 units @ `2
3 April Receipt No. 6 30 units @ `3
4 April Issues 40 units
5 April Returned to store by production department from issue of 4.4.2012 5 units
6 April Receipt No. 8 20 units @ `4
7 April Receipt No. 9 50 units @ `5
9 April Issues 40 units
13 April Issues 40 units
16 April Returned to vendor from goods purchased on 7.4.2012 5 units
18 April Transferred from Job 182 to 187 19 units
20 April Receipt No. 10 30 units @ `6
25 April Issues 20 units
The stock verifier of the company reported a shortage of 10 units on 15 April and 10 units on 30th
th

April.

Question – 30 [RTP – May20]

SK Appliances manufactures electronic home appliances. It follows weighted average cost method for
inventory valuation. Following are the data of component S:
Date Particulars Units Rate per unit
(`)
15 Dec Purchase Order – 002 10,000 9,930
30 Dec Purchase Order – 003 10,000 9,780
01 Jan Opening stock 3,500 9,810
05 Jan GRN*-002 (against Purchase Order – 002) 10,000 -
05 Jan MRN**-001 (against the Purchase Order – 002) 500 -
06 Jan Material Requisition – 005 3,000 -
07 Jan Purchase Order – 004 10,000 9,750
10 Jan Material Requisition – 006 4,500 -
12 Jan GRN-003 (against the Purchase Order – 003) 10,000 -
12 Jan MRN-002 (against the Purchase Order – 003) 400 -
15 Jan Material Requisition – 007 2,200 -
24 Jan Material Requisition – 008 1,500 -
25 Jan GRN-004 (against the Purchase Order – 004) 10,000 -
28 Jan Material Requisition – 009 4,000 -
31 Jan Material Requisition – 010 3,200 -
*GRN – Goods Received Note; **MRN – Material Returned Note
Based on the above data, you are required to Calculate:

Material Cost
 CA Sunil Keswani 159
(a) RE-order level
(b) Maximum stock level
(c) Minimum stock level
(d) Prepare store ledger for the period January and determine the value of stock as on 31 Jan.
(e) Value of components used during the month of January.
(f) Inventory turnover ratio.
[Answer – (a) 94,500 units; (b) 85,000 units; (c) 43,500 units; (d) `1,39,001; (e) `1,81,061; (f)
2.09 times]

Question – 31 [May23]
A Limited has furnished the following information for the months from 1st January to 30th April,
2023:
January February March April
Number of working days 25 24 26 25
Production (in units) per working day 50 55 60 52
Raw material purchases (% by weights to 21% 26% 30% 23%
total of 4 months)
Purchase price of raw material (per kg) `10 `12 `13 `11
Quantity of raw material per unit of product: 4 kg
Opening stock of raw material on 1st January: 6,020 kg (Cost `63,210)
Closing stock of raw material on 30th April: 5,100 kg
All the purchases of material are made at the start of each month.
Required:
(i) Calculate the consumption of raw materials (in kgs) month by month and in total
(ii) Calculate the month-wise quantity and value of raw materials purchased.
(iii) Prepare the priced stores ledger for each month using the FIFO method.
[Answer – (i) 5,000; 5,280; 6,240; 5,200; 21,720; (ii) `43,680; `64,896; `81,120; `52,624; (iii)
`56,732]

Question – 32 [May22]
A Ltd. a toy company purchases its requirement of raw material from S Limited at `120 per kg. The
company incurs a handling cost of `400 plus freight of `350 per order. The incremental carrying cost
of inventory of raw material is `0.25 per kg per month. In addition, the cost of working capital finance
on the investment in inventory of raw material is `15 per kg per annum. The annual production of the
toys is 60,000 units and 5 units of toys are obtained from one kg of raw material.

Material Cost
 CA Sunil Keswani 160
Required:
(i) Calculate the Economic Order Quantity (EOQ) of raw materials.
(ii) Advise, how frequently company should order to minimize its procurement cost. Assume
360 days in a year.
(iii) Calculate the total ordering cost and total inventory carrying cost per annum as per EOQ.
[Answer – (i) 1,000 kg; (ii) 30 days; (iii) `18,000]

Question – 33 [SM]
(a) SK Ltd. has received an offer of quantity discounts on its order of materials as under:
Price per ton (`) Ton (Nos.)
1,200 Less than 500
1,180 500 and less than 1,000
1,160 1,000 and less than 2,000
1,140 2,000 and less than 3,000
1,120 3,000 and above
The annual requirement for the material is 5,000 tons. The ordering cost per order is `1,200 and the
stock holding cost is estimated at 20% of material cost per annum. You are required to compute the
most economical purchase level.

(b) What will be your Answer, if there are no discounts offered and the price per ton is `1,500?
[Answer – (a) 1,000 units; (b) 200 units]

Question – 34 [SM]
The complete Gardner is deciding on the economic order quantity for two brands of lawn fertilizer:
SK and PM. The following information is collected:

Fertilizer SK PM
Annual Demand 2,000 Bags 1,280 Bags
Relevant ordering cost per purchase order `1,200 `1,400
Annual relevant carrying cost per bag `480 `560
Required:
(a) Compute EOQ for SK and PM.
(b) For the EOQ, what is the sum of the total annual relevant ordering costs and total annual
relevant carrying costs for SK and PM.
(c) For the EOQ compute the number of deliveries per year for SK and PM.
[Answer – (i) 100 bags; 80 bags; (ii) `48,000; `44,800; (iii) 20 orders; 16 orders]

Material Cost
 CA Sunil Keswani 161
Question – 35 [May18]
M/s X Private Limited is manufacturing a special product which requires a component “SKY BLUE”.
The following particulars are collected for the year ended 31st March, 2018:
Annual demand of “SKY BLUE” 12,000 units
Cost of placing an order `1,800
Cost per unit of “SKY BLUE” `640
Carrying cost per annum 18.75%
The company has been offered a quantity discount of 5% on the purchase of “SKY BLUE”, provided
the order size is 3,000 components at a time.
Required:
(a) Compute the economic order quantity
(b) Advise whether the quantity discount offer can be accepted
[Answer – (a) 600 units; (b) Accept the offer]

Question – 36 [Nov19]
Surekha Limited Produces 4,000 litres of paints on a quarterly basis. Each litre requires 2 kg of raw
material. The cost of placing one order for raw material is `40 and the purchasing price of raw material
is `50 per kg. The storage cost and interest cost is 2% and 6% per annum respectively. The lead time
for procurement of raw material is 15 days. Calculate Economic Order Quantity and Total Annual
Inventory Cost in respect of the above raw material.
[Answer - `16,03,200]

Question – 37 [SM]
SK Ltd. buys its annual requirement of 36,000 units in 6 instalments. Each unit costs `1 and the
ordering cost is `25. The inventory carrying cost is estimated at 20% of unit value. Find the total
annual cost of the existing inventory policy. Calculate, how much money can be saved by economic
order quantity?
[Answer - `750; `150]

Question – 38 [Nov20]
An automobile company purchases 27,000 spare parts for its annual requirements. The cost per order
is `240 and the annual carrying cost of average inventory is 12.5%. Each spare part costs `50.

At present, the order size is 3,000 spare parts.

(Assume that number of days in a year = 360 days)
Find out:
(i) How much the company’s cost would be saved by opting EOQ model?
(ii) The Re-order point under EOQ model if lead time is 12 days.
(iii) How frequently should orders for procurement be placed under EOQ model?

Material Cost
 CA Sunil Keswani 162
[Answer – (i) `2,475; (ii) 900 units; (iii) 18.94 days]

Question – 39 [SM]
SK Ltd. produces a product which has a monthly demand of 4,000 units. The product requires a
component X which is purchased at `20. For every finished product, one unit of component is
required. The ordering cost is `120 per order and the holding cost is 10% p.a.

You are required to calculate:

(i) Economic order quantity
(ii) If the minimum lot size to be supplied is 4,000 units, what is the extra cost, the company has
to incur?
(iii) What is the minimum carrying cost, the company has to incur?
[Answer – (i) 2,400 units; (ii) `640; (iii) `2,400]

Question – 40 [MTP – Nov18]

The annual demand for an item of raw material is 4,000 units and the purchase price is expected to be
`90 per unit. The incremental cost of processing an order is `135 and the annual cost of storage is
estimated to be `12 per unit. Compute the optimal order quantity and total relevant cost of this order
quantity?
Suppose that `135 as estimated to be the incremental cost of processing an order is incorrect and
should have been `80. All other estimates are correct. Estimate the difference in cost on account of
this error?

Assume at the commencement of the period that a supplier offers 4,000 units at a price of `86. The
materials will be delivered immediately and placed in the stores. Assume that the incremental cost of
placing the order is zero and original estimate of `135 for placing an order for the economic batch is
correct. Analyze, should the order be accepted?
[Answer – Cost of error = `94; Not to accept the offer]

Question – 41 [SM]
A company uses three raw materials A, B and C for a particular product for which the following data
apply:
Raw Usage per Reorder Price per Delivery period Reorder Minimum
material unit Quantity Kg Min Average Max level level
(Kg) (Kg) (` ) (Kg) (Kg)
A 10 10,000 0.10 1 2 3 8,000
B 4 5,000 0.30 3 4 5 4,750
C 6 10,000 0.15 2 3 4 2,000

Material Cost
 CA Sunil Keswani 163
Weekly production varies from 175 to 225 units, averaging 200 units of the said product. What would
be the following quantities:
(a) Minimum stock of A?
(b) Maximum stock of B?
(c) Re-order level C?
(d) Average stock level of A?
[Answer – (a) 4,000 kg; (b) 7,650 kg; (c) 5,400 kg; (d) 9,000 kg]

Question – 42 [RTP – Nov20]

A company uses four raw materials A, B, C and D for a particular product for which the following
data apply:
Raw Usage Re- Price Delivery period (in weeks) Re- Minimum
Material per order per order level (Kg)
unit of Quantity Kg level
product (Kg) (` ) (Kg)
(Kg)
Minimum Average Maximum
A 12 12,000 12 2 3 4 60,000 ?
B 8 8,000 22 5 6 7 70,000 ?
C 6 10,000 18 3 5 7 ? 25,500
D 5 9,000 20 1 2 3 ? ?
Weekly production varies from 550 to 1,250 units, averaging 900 units of the said product. What
would be the following quantities:
(i) Minimum Stock of A?
(ii) Maximum Stock of B?
(iii) Re-order level of C?
(iv) Average stock level of A?
(v) Re-order level of D?
(vi) Minimum Stock level of D?
[Answer – (i) 27,600 kg; (ii) 56,000 kg; (iii) 52,500 kg; (iv) 33,000 kg; (v) 18,750 kg; (vi) 9,750
kg]

Question – 43 [RTP – Nov18]

SK Ltd. is the manufacturer of monitor for PCs. A monitor requires 4 units of Part-S. The following
are the details of this operation during 2020:
Average monthly market demand 2,000 Monitors
Ordering cost `1,000 per order
Inventory carrying cost 20% per annum
Cost of Part `350 per part
Normal usage 425 parts per week

Material Cost
 CA Sunil Keswani 164
Minimum usage 140 parts per week
Maximum usage 710 parts per week
Lead time to supply 3-5 weeks
Compute from the above:
(a) Economic order quantity (EOQ). If the supplier is willing to supply quarterly 30,000 units of Part-
S at a discount of 5%, is it worth accepting?
(b) Re-order level
(c) Maximum level of stock
(d) Minimum level of stock
[Answer – (a) 1,656 units; Accept; (b) 3,550 units; (c) 4,786 units; (d) 1,850 units]

Question – 44 [Nov22]
MM Ltd. uses 7500 valves per month which is purchased at a price of `1.50 per unit. The carrying
cost is estimated to be 20% of average inventory investment on an annual basis. The cost to place an
order and getting the delivery is `15. It takes a period of 1.5 months to receive a delivery from the
date of placing an order and a safety stock of 3,200 valves is desired.
You are required to determine:
(i) The Economic Order Quantity (EOQ) and the frequent orders.
(ii) The re-order point
(iii) The Economic Order Quantity (EOQ) if the valve cost `4.50 each instead of 1.50 each.
(Assume a year consist of 360 days)
[Answer – (i) 3,000 valves; 12 days; (ii) 14,450 valves; (iii) 1,733 valves]

Question – 45 [May19]
ACE Ltd. produces a product EMM using a material ‘REX’. To produce one unit of EMM 0.80 kg of
‘REX’ is required. As per the sales forecast conducted by the company it will be able to sell 45,600
units of product EMM in the coming year. There is an opening stock of 3,150 units of product EMM
and company desires to maintain closing stock equal to one month’s forecasted sale. Following is the
information regarding material ‘REX’.
Purchase price per kg `25
Cost of placing order `240 per order
Storage cost 2% per annum
Interest rate 10% per annum
Average lead time 8 days
Difference between minimum and maximum lead time 6 days
Maximum usage 150 kg
Minimum usage 90 kg
Opening stock of material ‘REX’ is 2,100 kg and closing stock will be 10% more than opening stock.
Required:
(i) Compute the EOQ and total cost as per EOQ

Material Cost
 CA Sunil Keswani 165
(ii) Compute the reorder level and maximum level
(iii) If the company places an order of 7,500 kg of REX at a time, it gets 2% discount, should the
offer be accepted?
[Answer – (i) 2,440 kg; `9,37,750; (ii) 1,650 kg; 3,640 kg; (iii) Accept the offer]

Question – 46 [MTP – Nov21]

The yearly production of a company’s product which has a steady market is 40,000 units. Each unit
of a product requires 1 kg of raw material. The cost of placing one order for raw material is `1,000
and the inventory carrying cost is `20 per annum. The lead time for procurement of raw material is
36 days and a safety stock of 1,000 kg of raw materials is maintained by the company. The company
has been able to negotiate the following discount structure with the raw material supplier:
Order Quantity (kgs) Discount (`)
Upto 6,000 Nil
6,000 – 8,000 4,000
8,000 – 16,000 20,000
16,000 – 30,000 32,000
30,000 – 45,000 40,000
You are required to:
(a) Calculate the re-order point taking 30 days in a month
(b) Prepare a statement showing the total cost of procurement and storage of raw materials after
considering the discount if the company elects to place one, two, four or five orders in the year.
(c) State the number of orders which the company should place to minimize the costs after taking
EOQ also into consideration.
[Answer – (a) 5,000 kg; (b) `3,61,000; `1,70,000; `84,000; `81,000; (c) 20 orders]

Question – 47 [Nov18]
M/s SJ Private Limited manufactures 20,000 units of a product per month. The cost of placing an order
is `1,500. The purchase price of the raw material is `100 per kg. The re-order period is 5 to 7 weeks.
The consumption of raw materials varies from 200 kg to 300 kg per week, the average consumption
being 250 kg. The carrying cost of inventory is 9.75% per annum.

You are required to calculate:

(i) Re-order quantity
(ii) Re-order level
(iii) Maximum level
(iv) Minimum level
(v) Average stock level
[Answer – (i) 2,000 kg; (ii) 2,100 kg; (iii) 3,100 kg; (iv) 600 kg; (v) 1,850 kg]

Material Cost
 CA Sunil Keswani 166
Question – 48 [RTP – Nov22]
M/s Tanishka Materials Private Limited produces a product which names “ESS”. The consumption
of raw material for the production of “ESS” is 210 kgs to 350 kgs per week. Other information is as
follows:
Procurement time 5 to 9 days
Purchase price of raw material `100 per kg
Ordering cost per order `200
Storage cost 1% per month plus `2 per unit per annum
Consider 365 days a year:
You are required to calculate:
(a) Economic order quantity
(b) Re-order level
(c) Maximum level
(d) Minimum level
(e) Average stock level
(f) Number of orders to be placed per year
(g) Total inventory cost
(h) If the supplier is willing to offer 1% discount on purchase of total annual quantity in two
orders, whether offer is acceptable?
(i) If the Answer is no, what should be the counter offer w.r.t. percentage of discount?
[Answer – (a) 646 kg; (B) 450 kg; (c) 946 kg; (d) 170 kg; (e) 558 kg; (f) 23 orders; (g)
`14,69,122; (h) not to accept offer; (i) Discount of at least 2.82%]

Question – 49 [MTP – Nov22]

A company produces a product ‘AB’ by using two raw materials – ‘Material Ae’ and ‘Material Be’
in the ratio of 5:3.

A sales volume of 50,000 kgs is estimated for the month of December by the managers expecting the
trend will continue for the entire year. The ratio of input and output is 8:5.

Other information about raw material Ae is as follows:

Purchase price `150 per kg
Re-order period 2 to 3 days
Carrying cost 12%

Note: Material Ae is perishable in nature and if not used within 3.5 days of purchase if becomes
obsolete.

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 CA Sunil Keswani 167
To place an order for material ‘Ae’ the company has to incur an administrative cost of `375 per order.
At present, material ‘Ae’ is purchased in a lot of 7,500 kgs to avail the discount on purchase. Company
works for 25 days in a month and production is carried out evenly.

You are required to calculate:

(a) Economic order quantity (EOQ) for material Ae
(b) Maximum stock level for Material Ae
[Answer – (a) 5,000 kg; (b) 7,000 kg]

Question – 50 [SM]
From the following details, draw a plan of ABC selective control:
Item Units Unit Cost (`)
1 7,000 5.00
2 24,000 3.00
3 1,500 10.00
4 600 22.00
5 38,000 1.50
6 40,000 0.50
7 60,000 0.20
8 3,000 3.50
9 300 8.00
10 29,000 0.40
11 11,500 7.10
12 4,100 6.20
Assume the following basis for selective control:
`50,000 and above - Category A
`15,000 to `50,000 - Category B
Below `15,000 - Category C
[Answer – Category A – 11, 2, 5; Category B – 1, 12, 6, 3; Category C – 4, 7, 10, 8, 9]

Question – 51 [SM]
A factory uses 4,000 varieties of inventory. In terms of inventory holding and inventory usage, the
following information is compiled:
No. of varieties of % % value of inventory % of inventory usage (in
inventory holding (average) end-product)

3,875 96.875 20 5
110 2.750 30 10
15 0.375 50 85
4,000 100.00 100 100

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 CA Sunil Keswani 168
Classify the items of inventory as per ABC analysis with reasons.
[Answer – C; B; A]

Question – 52 [SM]
The following data are available in respect of material X for the year ended 31st March, 2021.
Opening stock `90,000
Purchases during the year `2,70,000
Closing stock `1,10,000
Calculate:
(i) Inventory turnover ratio, and
(ii) The number of days for which the average inventory is held.
[Answer – (i) 2.5 times; (ii) 146 days]

Question – 53 [SM]
From the following data for the year ended 31st March, calculate the inventory turnover ratio of the
two items and put forward your comments on them.
Material A(`) Material B(`)
Opening stock 10,000 9,000
Purchases during the year 52,000 27,000
Closing stock 6,000 11,000
[Answer – Material A – 7 times; 52 days; Material B – 2.5 times; 146 days]

Question – 54 [Dec21]
XYZ Ltd uses two types of raw materials – ‘Material A’ and ‘Material B’ in the production process
and has provided the following data for the year ended on 31st March, 2021:
Particulars Material A (`) Material B (`)
Opening stock as on 1.04.2020 30,000 32,000
Purchases during the year 90,000 51,000
Closing stock as on 31.02.2021 20,000 14,000
(i) You are required to calculate:
a) The inventory turnover ratio of ‘Material A’ and ‘ Material B’
b) The number of days for which the average inventory is held for both materials ‘A’ and
‘B’.
(ii) Based on above calculations, give your comments.
(Assume 360 days in a year)
[Answer – (i) (a) 4 times; 3 times; (b) 90 days; 120 days; (ii) Material A is fast moving]

Question – 55 [May18]
The following details are provided by M/s SKU Enterprises for the year ended 31st March, 2018:

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 CA Sunil Keswani 169
Particulars Material – M (`) Material-N (`)
Stock as on 01-04-2017 6,00,000 10,00,000
Stock as on 31-03-2018 4,50,000 7,25,000
Purchases during the year 9,50,000 18,40,000
You are required to:
(i) Calculate Turnover Ratio of both the materials
(ii) Advise which of the two materials is fast moving. (Assume 360 days in a year)
[Answer – (i) 2 times; 2.4 times; (ii) Material N]

Question – 56 [SM]
An invoice in respect of a consignment of chemicals A and B provide the following information:
(` )
Chemical A: 10,000 kgs at `10 per kg 1,00,000
Chemical B: 8,000 kgs at `13 per kg 1,04,000
Basic custom duty @10% (credit is not allowed) 20,400
Railway freight 3,840
2,28,240
A shortage of 500 kg in chemical A and 320 kg in chemical B is noticed due to normal breakages.
You are required to compute the rate per kg of each chemical, assuming a provision of 2% for further
deterioration.
[Answer - `12.04; `15.43]

Question – 57 [SM]
M/s SK Ltd trades in chairs. It stocks sufficient quantity of chairs of almost every variety. In year end,
the report of sales manager revealed that M/s SK experienced stock-out of chairs. The stock-out data
is as follows:
Stock-out of chairs No. of times
100 2
80 5
50 10
20 20
10 30
0 33
M/s SK loses `150 per unit due to stock-out and spends `50 per unit on carrying of inventory.
Determine optimum safest stock level.
[Answer – 20 units]

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 CA Sunil Keswani 170
Question – 58 [May19]
The following are the details of receipt and issue of material ‘CXE’ in a manufacturing Co. during the
month of April 2019:
Date Particulars Quantity Rate per
(kg) kg
April 4 Purchases 3,000 `16
April 8 Issue 1,000
April 15 Purchases 1,500 `18
April 20 Issue 1,200
April 25 Return to supplier out of purchase made on April 15 300
April 26 Issue 1,000
April 28 Purchase 500 `17
Opening stock as on 01-04-2019 is 1,000 kg @ `15 per kg.
On 30th April, 2019 it was found that 50 kg of material ‘CXE’ was fraudulently misappropriated by
the store assistant and never recovered by the company. Required:
(i) Prepare a store ledger account under each of the following method of pricing the issue:
a) Weighted Average Method
b) LIFO
(ii) What would be the value of material consumed and value of closing stock as on 30-04-2019 as
per these two methods?

Question – 59 [SM]
The following information is provided by SK Ltd. for the fortnight of April, 2022:
Material Exe:
Stock on 1-4-2022, 100 units at `5 per unit
Purchases:
5-4-2022, 300 units at `6
8-4-2022, 500 units at `7
12-4-2022, 600 units at `8
Issues:
6-4-2022, 250 units
10-4-2022, 400 units
14-4-2022, 500 units
Required:
(A) Calculate using FIFO and LIFO methods of pricing issues:
(a) the value of materials consumed during the period
(b) the value of stock of materials on 15-4-2022
(B) Explain why the figures in (a) and (b) in part A of this question are different under the two
methods of pricing of material issues used. You need not draw up the stores ledger.

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 CA Sunil Keswani 171
Question – 60 [SM]
SK Ltd. is recently incorporated start-up company back in the year 2019. It is engaged in creating
embedded products and internet of things ((IoT) solutions for the industrial market. It is focused on
innovation, design, research and development of products and services. One of its embedded products
is LogMax, a system on module (SoM) Carrier board for industrial use. It is a small, flexible and
embedded computer designed as per industry specifications. In the beginning of the month of
September 2022, company entered into a job agreement of providing 4,800 LogMax to Nit, Mandi.
Following details w.r.t. issues, receipts, returns of store department handling Micro-controller, a
component used in the designated assembling process have been extracted for the month of September,
2021:
Sep. 1 Opening stock of 6,000 units at `285 per unit
Sep. 8 Issued 4,875 units to mechanical division vide material requestion no. mech
009/20
Sep. 9 Received 17,500 units @`276 per unit vide purchase order no. 159/2020
Sep. 10 Issued 12,000 units to a technical division vide material requisition no. Tech -
21/20
Sep. 12 Returned to stores 2375 units by technical division against material requisition
no. Tech 021/20
Sep. 15 Received 9,000 units @`288 per units vide purchase order no. 160/2020
Sep. 17 Returned to supplier 700 units out of quantity received vide purchase order no.
160/2020
Sep. 20 Issued 9,500 units to technical division vide material requisition no. Tech 165/20
On 25th September, 2021, the stock manager of the company expressed his need to leave for his
hometown due to certain contingency and immediately left the job same day. Later, he also switched
his phone off.

As the company has the tendency of stock-taking every end of the month to check and report for the
loss due to rusting of the components, the new stock manager, on 30th September, 2021, found that
900 units of Micro-controllers where missing which was apparently misappropriated by the former
stock manager. He, further reported loss of 300 units due to rusting of the components.

From the above information, you are required to prepare the stock ledger account using ‘Weighted
Average’ method of valuing the issues.

Question – 61 [SM]
The following transactions in respect of material Y occurred during the six months ended 30th
September:
Month Purchase (units) Price per unit (`) Issued Units
April 200 25 Nil

Material Cost
 CA Sunil Keswani 172
May 300 24 250
June 425 26 300
July 475 23 550
August 500 25 800
September 600 20 400
Required:
(a) The chief accountant argues that the value of closing stock remains the same no matter which
method of pricing of material issues is used. Do you agree? Why or why not? Explain. Detailed
stores ledger are not required.
(b) State when and why would you recommend the LIFO method of pricing material issues?

Question – 62 [SM]
The following information is extracted from the stores ledger:
Material X
Opening stock Nil
Purchases:
Jan. 1 100 @ `1 per unit
Jan. 20 100 @ `2 per unit
Issues:
Jan. 22 60 for Job W16
Jan. 23 60 for Job W 17
Complete the receipts and issues valuation by adopting the First-in-First-Out, Last-in-First-out and the
weighted average method. Tabulate the values allocated to Job W16 and W17 and the closing stock
under the methods aforesaid.

Question – 63 [SM]
SK Ltd. furnishes the following store transactions for September:
1 Sep Opening balance 25 units value `162.50
4 Sep Issues Req. No. 85 8 units
6 Sep Receipts from B & Co. GRN No. 26 50 units @ `5.75 per unit
7 Sep Issues Req. No. 97 12 units
10 Sep Return to B & Co. 10 units
12 Sep Issues Req. No. 108 15 units
13 Sep Issues Req. No. 110 20 units
15 Sep Receipts from M & Co. GRN No. 33 25 units @ `6.10 per unit
17 Sep Issues Req. No. 121 10 units
19 Sep Received replacement from B & Co. GRN No. 38 10 units
20 Sep Returned from department, material of M & CO. MRR No. 4 5 units
22 Sep Transfer from Job 182 to Job 187 in the dept. MTR 6 5 units
26 Sep Issues Req. No. 146 10 units

Material Cost
 CA Sunil Keswani 173
29 Sep Transfer from Dept. A to Dept. B MTR 10 5 units
30 Sep Shortage in stock taking 2 units
Write up the priced stores ledger on FIFO method and discuss how would you treat the shortage in
stock taking

Question – 64 [MTP – May24]

From the following information, calculate the total cost of Product A and B using the ABC Analysis:
Product A Product B
Units 5,000 5,000
Number of purchase order placed 100 220
Number of deliveries received 70 200
Ordering cost `4,00,000
Delivery cost `1,35,000
A. A = `47,500; B = `1,27,500
B. A = `2,67,500; B = `2,67,500
C. A = `1,60,00; B = `3,75,000
D. A = `1,47,500; B = `1,47,500
[Answer – (C)]

Question – 65 [RTP – May24]

The purchase committee of A Ltd. has been entrusted to review the material procurement policy of
the company. The chief marketing manager has appraised the committee that the company at present
produces a single product X by using two raw materials A and B in the ratio of 3:2. Material A is
perishable in nature and has to be used within 10 days from Goods received note (GRN) date
otherwise material becomes obsolete. Material B is durable in nature and can be used even after one
year. Material A is purchased from the local market within 1 to 2 days of placing order. Material
B, on the other hand, is purchased from neighbouring state and it takes 2 to 4 days to receive the
material in the store.
The purchase price of per kilogram of raw material A and B is `30 and `44 respectively
exclusive of taxes. To place an order, the company has to incur an administrative cost of `1,200.
Carrying cost for Material A and B is 15% and 5% respectively. At present material A is purchased
in a lot of 15,000 kg. to avail 10% discount on market price. GST applicable for both the materials
is 18% and the input tax credit is availed.
The sales department has provided an estimate that the company could sell 30,000 kg. in January
2024 and also projected the same trend for the entire year.

The ratio of input and output is 5:3. Company works for 25 days in a month and production is
carried out evenly.
The following queries/calculations to be kept ready for purchase committees’ reference:
(i) For the month of January 2024, what would be the quantity of the materials to be

Material Cost
 CA Sunil Keswani 174
requisitioned for both material A and B:
(a) 9,000 kg & 6,000 kg respectively
(b) 18,000 kg & 12,000 kg respectively
(c) 27,000 kg & 18,000 kg respectively
(d) 30,000 kg & 20,000 kg respectively.
(ii) The economic order quantity (EOQ) for both the material A & B:
(a) 13,856 kg & 16,181 kg respectively
(b) 16,197 kg & 17,327 kg respectively
(c) 16,181 kg & 17,165 kg respectively
(d) 13,197 kg & 17,165 kg respectively
(iii) What would the maximum stock level for material A:
(a) 18,200 kg. (b) 12,000 kg. (c) 16,000 kg. (d) 16,200 kg.
(iv) Calculate saving/ loss in purchase of Material A if the purchase order quantity is equal
to EOQ.
(a) Profit of Rs. 3,21,201. (b) Loss of Rs. 3,21,201.
(c) Profit of Rs. 2,52,500. (d) Loss of Rs. 2,52,500.
(v) What would the minimum stock level for material A:
(a) 1,800 kg. (b) 1,200 kg. (c) 600 kg. (d) 2,400 kg.
[Answer – (i) D; (ii) A; (iii) B; (iv) B; (v) C]

Solution – 32
(a) A = 60,000 ÷ 5 = 12,000 kg
O = 400 + 350 = `750
C = 15 + (0.25 × 12) = `18

EOQ = A ! # ! " =!!×C!,MMM×NBM = 1,000 kg

! CO

(b) Number of orders to be placed = &655Q.0&+*3Q+E*-*5/&1O &-./*+E.0 = C,MMM = 12 orders

C!,MMM
#+,*+&'E)*&!"#A%
@AM @AM
Frequency of order = I&. &* &.4-.'
= C!
= 30 days
(c) Total ordering cost = No. of order ´ cost per order = 12 ´ 750 = `9,000
$.4-. Q/R- C,MMM
Total carrying cost = !
´ carrying cost per unit p.a. = !
´ 18 = `9,000
Total cost = `18,000

Material Cost
 CA Sunil Keswani 175
Solution – 33
(a) Statement of Cost
Total Order Price No. of Cost of Ordering Carrying Total
annual Size per Orders inventory cost (OC) cost (CC) cost
requirement (Tonnes) tonne (A÷OS= (PC) (S ´ [(OS÷2)´ (PC +
(A) (OS) (P) S) (A ´ P) `12,00) P] OC +
CC)
5,000 400 1,200
12.5 or 60,00,000 15,600 48,000 60,63,000
13
500 1,180 10 59,00,000 12,000 59,000 59,71,000
1,000 1,160 5 58,00,000 6,000 1,16,000 59,22,000
2,000 1,140 2.5 or 3 57,00,000 3,600 2,28,000 59,31,600
3,000 1,120 1.666 or 56,00,000 2,400 3,36,000 59,38,400
2
From the above table, it can be verified that total cost is lowest in case when the order size is 1,000
units. Thus, most economical purchase level is 1,000 units.

(b) If there is not discounts offered than the order size should be equal to EOQ.
!×#×$ !×B,MMM×C,!MM
EOQ = ! %
=! !M%×`C,BMM
= 200 units

Solution – 34

SK PM
(i) A = Annual Requirement 2000 Bags 1280 Bags
O = Ordering cost per order `1200 `1400
C = Carrying cost/unit/annum `480 `560
!×#×$ !×!,MMM×C,!MM !×C,!OM×C,UMM
EOQ =! %
! = 100 bags ! = 80 bags
UOM BAM

(ii) Ordering cost [(A÷EOQ)´O) [(2,000÷100)´1200] = [(1,280÷80)´1400] =

Carrying cost [(EOQ÷2)´C] `24,000 `22,400
Total of ordering and carrying [(100 ÷ [(80 ÷ 2)´560] = `22,400
cost 2)´480] = `24,000 `22,400 + `22,400 =
`24,000 + `24,000 = `44,800
`48,000
(iii) No. of Deliveries i.e; No. of [2,000 ÷ 100] = 20 orders [1,280 ÷ 80] =16 orders
orders to be placed per year p.a. p.a.
[A÷EOQ]

Material Cost
 CA Sunil Keswani 176
Solution – 35
!×#×$
(i) EQO = ! %
A = 12,000 units
O = `1,800
C = `640 per unit × 18.75% = `120 per unit
!×C!,MMM×C,OMM
EOQ = ! C!M
= 600 units
(ii) Statement showing evaluation of proposal
Particulars Order 600 units Order 3,000 units
Annual purchase cost (`640/608 p.u) 76,80,000 72,96,000
Annual Ordering cost (`1,800 per order) 36,000 7,200
Annual carrying cost (`120/114 per unit) 36,000 1,71,000
Total Cost `77,52,000 `74,74,200
Since the total cost is lower by `2,77,800 in case when the company gets the discount offer of 5%,
thus, it is recommended to accept the discount offer with order size of 3,000 units.

Solution – 36
A = 4,000 × 2 × 4 = 32,000 kg
O = `40
C = 50 × (2% + 6%) = `4
!×#×$ !×@!,MMM×UM
EOQ = ! %
=! U
= 800 kg
Total inventory cost = Purchase cost + Ordering cost + Carrying cost
@!,MMM OMM
= (32,000 × 50) + " OMM
× 40& + " !
× 4& = `16,03,200

Solution – 37
(a) Total ordering cost = 6 orders ´ `25 = `150
@A,MMM C
Total carrying cost = A
× ! × 20% × 1 = `600
Total Cost = `750
!×@A,MMM×!B
(b) EOQ = ! !M%×C
= 3,000 units
@A,MMM
Total ordering cost = @,MMM
× `25 = `300
C
Total carrying cost = 3,000 × ! × 20% × 1 = `300
Total Cost = `600
Saving due to EOQ = `750 - `600 = `150

Material Cost
 CA Sunil Keswani 177
Solution – 38
(i) Annual requirement (A) = 27,000
Cost per order (O) = `240
Carrying cost per unit p.a. (C) = 50 × 12.5% = `6.25
!×#×$ !×!N,MMM×!UM
EOQ = ! %
=! A.!B
= 1,440 units
Statement of Cost
Particulars Order size = 3,000 Order size = 1,440
Purchase cost 27,000 × 50 = 13,50,000 27,000 × 50 = 13,50,000
Ordering cost !N,MMM !N,MMM
@,MMM
× 240 = 2,160 C,UUM
𝑜𝑟18.75 𝑜𝑟 19 × 240 = 4,560
Carrying cost @,MMM C,UUM
!
× 6.25 = 9,375 !
× 6.25 = 4,500
Total cost 13,61,535 13,59,060
Saving due to EOQ = `13,61,535 - `13,59,060 = `2,475

!N,MMM
(ii) Re-order point = Maximum consumption × Maximum time = @AM
× 12 = 900 units
!N,MMM
(iii) Number of orders under EOQ Model = C,UUM
= 18.75 or 19
@AM
Frequency of order = CV
= 18.94 days

Solution – 39
A! #!"
(i) EQO =
!
A = 4000× 12 = 48000 units
O = `120 per order
C = 20×10% = `2 per order per annum
! ! $%### ! "!#
EOQ = = 2400 units
!
(ii) Statement Showing Determination of various cost
Order 2400 units Order 4000 units
UO,MMM U,OMMM 2,400 1,440
Annual Ordering cost " !,UMM ´120& " U,MMM ´120&
!,UMM U,MMM
Annual Carrying cost " !
´2& " !
´2& 2,400 4,000
Total Cost 4,800 5,440
Extra Cost includes = `(5550 – 4800) = `640
(iii) Minimum Carrying Cost = `2,400 which is possible at 2,400 units (EOQ)

Material Cost
 CA Sunil Keswani 178
Solution – 40
!×#×$ !×U,MMM×C@B
EOQ = ! %
=! C!
= 300 units
Number of orders = 4,000 ÷ 300 = 13.33 or 14 orders
Relevant cost of this order quantity:
Ordering cost [14 × 135] 1,890
Carrying cost [(300 ÷ 2) × 12] 1,800
Relevant cost 3,690

!×#×$ !×U,MMM×OM
Revised EOQ = ! %
=! C!
= 231 units
Number of orders = 4,000 ÷ 231 = 17.31 or 18 orders
Statement of Cost
Costs Order Size = 300 Order Size = 231
Ordering Cost 14 ´ 80 = 1,120 18 ´ 80 = 1,440
Carrying Cost @MM !@C
× 12 = 1,800
!
× 12 = 1,386 !
Total Cost 2,920 2,826
Difference in cost on account of this error = 2,920 – 2,826 = `94

Statement of Evaluation of Offer

Costs Order Size = 300 Order Size = 4,000
Purchase Cost 4,000 × 90 = 3,60,000 4,000 × 86 = 3,44,000
U,MMM
Ordering Cost 14 ´ 135 = 1,890 ×0=0 U,MMM
Carrying Cost @MM U,MMM
!
× 12 = 1,800 !
× 12 = 24,000
Total Cost 3,63,690 3,68,000
This special offer at `86 per unit should not be accepted as its total cost is higher as compared to
original offer.

Solution – 41
(a) Minimum stock of A = ROL – (Average lead time × Average consumption)
= 8,000 – (2× 200 × 10) = 4,000 kg
(b) Maximum stock of B = ROL + ROQ – (Min. lead time × Min. consumption)
= 4,750 + 5,000 – (3× 175 × 4) = 7,650 kg
(c) Re-order level of C = Max. lead time × Max. consumption
= 4 × 225 × 6 = 5,400 kg
G$W CM,MMM
(d) Average level of A = Minimum level + !
= 4,000 + !
= 9,000 kg

Material Cost
 CA Sunil Keswani 179
Solution – 42
(i) Minimum stock of A = Re-order level – (Avg. consumption × Avg. delivery time)
= 60,000 – (900 × 12 × 3) = 27,600 kg
(ii) Maximum stock of B = Re-order level + Re-order quantity – (Min. consumption × Min. time)
= 70,000 + 8,000 – (550 × 8 × 5) = 56,000 kg
(iii) Re-order level of C = Maximum consumption × Maximum delivery time
= (1,250 × 6) × 7 = 52,500 kg
G-X&.4-. W3,2(/(;
(iv) Average stock of A = Minimum stock + !
C!,MMM
= 27,600 + !
= 33,000 kg
(v) Re-order level of D = Maximum consumption × Maximum time
= (1,250 × 5) × 3 = 18,750 kg
(vi) Minimum stock of D = Re-order level – (Avg. consumption × Avg. time)
= 18,750 – (900 × 5 × 2) = 9,750 kg

Solution – 43
(a) A = Annual usage of parts = 2,000 × 4 × 12 = 96,000 units
O = Cost per order = `1,000
C = Carrying cost per unit per annum = 350 × 20% = `70
!×#×$ !×VA,MMM×C,MMM
EOQ = ! %
=! NM
= 1,656 parts (approx.)

The supplier is willing to supply 30,000 units at a discount of 5%, therefore cost of each part
shall be `350 – 5% = `332.50
Statement of Evaluation of Offer
Particulars Order 30,000 units Order 1,656 units
Annual Purchase Cost 96,000×332.5= 3,19,20,000 18,000×350 = 3,36,00,000
Annual Ordering Cost VA,MMM VA,MMM
𝑜𝑟 4 × 1,000 = 4,000
@M,MMM
𝑜𝑟 58 × 1,000 =
C,ABA
58,000
Annual Carrying Cost @M,MMM C,ABA
!
× 332.5 × 20%= 9,97,500 × 350 × 20% =
!
57,960
Total Cost 3,29,21,500 3,37,15,960
Since the total cost under the supply of 30,000 units with 5% discount is lower than that when order
size is 1,656 units, therefore the offer should be accepted.

(b) Re-order level = Maximum consumption × Maximum re-order period

= 710 × 5 = 3,550 units
(c) Maximum level = ROL + ROQ – (Minimum consumption × Minimum re-order period)
= 3,550 + 1,656 – (140 × 3 = 4,786 units

Material Cost
 CA Sunil Keswani 180
(d) Minimum level = ROL – (Normal consumption × Normal re-order period)
= 3,550 – (425 × 4) = 1,850 units

Solution – 44
(i) A = 7,500 ´ 12 = 90,000 valves
O = `15
C = 20% ´ 1.50 = `0.30

EOQ = A ! # ! " =!!×VM,MMM×CB = 3,000 valves

! M.@M

Number of orders = 90,000 ÷ 3,000 = 30 orders

Frequency of order = 360 ÷ 30 = 12 days.
(ii) Re-order Quantity = Safety stock + (Average consumption ´ Average lead time)
= 3,200 + (7,500 ´ 1.5) = 14,450 valves
(iii) New carrying cost (C) = 20% ´ 4.50 = `0.90

EOQ = A ! # ! " =!!×VM,MMM×CB = 1,733 valves

! [Link]

Solution – 45
Working Notes:
(1) Production units of EMM = Sales + Closing stock – Opening stock
UB,AMM
= 45,600 + C!
– 3,150 = 46,250 units
(2) Quantity of REX required to produce 1 unit of EMM 0.80 kg
Quantity of REX required to produce 45,000 units of EMM 37,000 kg
Purchase units of REX = Consumption + Closing stock – opening stock
= 37,000 + 2,310 – 2,100 = 37,210 kg
(3) Maximum lead time – Minimum lead time = 6
Max. lead time = 6 + Minimum lead time
=/2/+3+ 0-,4 (/+-Y=,Z/+3+ 0-,4 (/+-
Also, Average lead time = !
=/2. 0-,4 (/+-Y A Y=/2. 0-,4 (/+-
8= !
16 = 2(Min. lead time) + 6
Min. lead time = 5 days
⸫ Max. lead time = 6 + 5 = 11 days

(i) Computation of EOQ

A = 37,210 kg
O = `240
C = (10% + 2%) × 25 = 12% × 25 = `3

Material Cost
 CA Sunil Keswani 181
!×#×$ !×@N,!CM×!UM
EOQ = ! %
=! @
= 2,440 kg
Number of orders = 37,210 ÷ 2,440 = 15.25 or 16
Total cost at EOQ = Purchase cost + Ordering cost + Carrying cost
!,UUM
= (37,210 × 25) + (16 × 240) + " !
× 3& = `9,37,750

(ii) Reorder level = Maximum usage × Maximum lead time = 150 kg × 11 days = 1,650 kg
Maximum level = Reorder level + Reorder Quantity – (Min. usage × Min. lead time)
= 1,650 + 2,440 – (90 × 5) = 3,640 kg

(iii) New Purchase price after 2% discount = 25 – 2% = `24.50

Number of orders = 37,210 ÷ 7,500 = 4.96 or 5
Total cost at order size of 7,500 kg = Purchase cost + Ordering cost + Carrying cost
N,BMM
= (37,210 × 24.50) + (5 × 240) + " !
× 12% × 24.50& = `9,23,870
With order size of 7,500 kg, company can save `13,880 (`9,37,750 – `9,23,870). Thus, it is
recommended to accept the offer.

Solution – 46
(i) Annual Production = 40,000 units
Annual Consumption of Raw Material = (40,000 units × 1 kg) = 40,000 kg
Reorder point = Safety Stock Level + Normal Usages × Normal Time
" !"# """$%& #
= 1,000 kg + $ ! '($)*+, % = 5,000 kg
& '("$)*+, '
(ii) Statement showing determination of EOQ
Annual No. of Size of Avg. Annual Annual Annual Annual ordering
Requirement Orders Order Units Ordering Carrying Discount &
(kg) P.a (kg) (kg) Cost(`) Cost(`) (`) Carrying cost
(A) (B) (C) offer
Discount (`)
(A)+(B)-(C)
40,000 1 40,000 20,000 1000 4,00,000 40,000 3,61,000
2 20,000 10,000 2000 2,00,000 32,000 1,70,000
4 10,000 5,000 4000 1,00,000 20,000 84,000
5 8,000 4,000 5000 80,000 4,000 81,000
!! "!# ! ! "#$ ### ! %##
(iii) EQO = = =2,000 kg
A !
No discount on purchases, sine the quantity is less than 6,000 kg

Material Cost
 CA Sunil Keswani 182
UM,MMM !,MMM
Total carrying cost and ordering cost = " !,MMM × 1,000& + " !
× 20& = `40,000
Advise: Optimal order size = 2,000 units
!"# """
Optimal number of orders p.a. = = 20 orders
$# """

Solution – 47
!×#×$
(i) EQO = ! %

A = 250 kg × 52 weeks = 13,000 kg

O = `1,500
C = `100 per kg × 9.75% = `9.75 per kg
!×C@,MMM×C,BMM
EOQ = ! [Link]
= 2,000 kg

(ii) Re-order level = Maximum Consumption × Maximum lead Time

= 300 × 7 = 2,100 kg
(iii)Maximum level = Reorder level + Reorder Qty – (Min consumption × min lead time)
= 2,100 + 2,000 – (200 × 5) = 3,100 kg
(iv) Minimum level = Reorder Level – (Average Consumption × Average Reorder Period)
= 2,100 – (250 × 6) = 600 kg
(v) Average Stock Level = (Minimum level + maximum level)/2
= (3,100 + 600)/2 = 1,850 kg

Solution – 48
Maximum consumption per day = 350 ÷ 7 = 50 kg
Minimum consumption per day = 210 ÷ 7 = 30 kg
Average consumption per day = (50 + 30) ÷ 2 = 40 kg
(a) A = 40 kg ´ 365 = 14,600 kg
O = `200 per order
C = (1% ´ 12 ´ 100) + 2 = `14
!×CU,AMM×!MM
EOQ = ! CU
= 646 kg
(b) Re-order level = Maximum Consumption × Maximum lead Time
= 50 × 9 = 450 kg
(c) Maximum level = Reorder level + Reorder Qty – (Min consumption × min lead time)
= 450 + 646 – (30 × 5) = 946 kg
(d) Minimum level = Reorder Level – (Average Consumption × Average Reorder Period)
= 450 – (40 × 7) = 170 kg
(e) Average Stock Level = (Minimum level + maximum level)/2

Material Cost
 CA Sunil Keswani 183
= (170 + 946)/2 = 558 kg
#223,0 1&2'3+7(/&2 CU,AMM
(f) Number of order per year = [$W
= AUA
= 22.60 or 23 orders
(g) Total inventory cost = Purchase cost + Ordering cost + Carrying cost
AUA
= (14600 ´ 100) + (23 ´ 200) + " × 14& = `14,69,122
!
(h) New offer price = 100 – 1% = `99
Revised carrying cost = (99 ´ 1% ´ 12) + 2 = `13.88
Revised order quantity = 14600 ÷ 2 = 7,300 kg
Total inventory cost = Purchase cost + Ordering cost + Carrying cost
N@MM
(after discount) = (14600 ´ 99) + (2 ´ 200) + " !
× 13.88& = `14,96,462
Since cost is higher at offer price, thus offer should not be accepted.
(i) Let new price = y
New carrying cost = (y ´ 1% ´ 12) + 2 = 0.12y + 2
Total inventory cost = Purchase cost + Ordering cost + Carrying cost
N@MM
= (14600 ´ y) + (2 ´ 200) + " !
× (0.12𝑦 + 2)&
= 14,600y + 400 + 438y + 7300
= 15,038 + 7,700

\ 14,69,122 = 15,038y + 7,700

y = `97.18
\ Discount per unit = `100 – `97.18 = `2.82
!.O!
Discount % = CMM
× 100= 2.82%

Solution – 49
(a) Annual raw material requirement = 50,000 ´ 12 ´ (8 ÷ 5) = 9,60,000 kg
Material requirement of Ae = 9,60,000 ´ (5 ÷ 8) = 6,00,000 kg
!×#×$ !×A,MM,MMM×@NB
EOQ = ! %
=! C!%×CBM
= 5,000 kg
(b) Maximum level for material Ae = ROL + ROQ – (Min. consumption × Min. lead time)
= (Max. cons. × Max. time) + ROQ – (Avg. consumption × Avg. time)
A,MM,MMM A,MM,MMM
=" !B×C!
× 3& + 7,500 - " !B×C! × 2& = 9,500 kg
Also, since material Ae is perishable in nature and will become obsolete after 3.5 days,
A,MM,MMM
\ Maximum level = " !B×C!
× 3.5& = 7,000 kg
So maximum level will be minimum of the two values i.e. 7,000 kg and 9,500 kg.
\ Maximum level for material Ae = 7,000 kg

Material Cost
 CA Sunil Keswani 184
Solution – 50
Statement of Total Cost and Classification
Item Units % of Total Unit Cost Total Cost % of Total Category
Units (` ) (`) Cost
1 7,000 3.1963 5.00 35,000 9.8378 B
2 24,000 10.9589 3.00 72,000 20.2378 A
3 1,500 0.6849 10.00 15,000 4.2162 B
4 600 0.2740 22.00 13,200 3.7103 C
5 38,000 17.3516 1.50 57,000 16.0216 A
6 40,000 18.2648 0.50 20,000 5.6216 B
7 60,000 27.3973 0.20 12,000 3.3730 C
8 3,000 1.3699 3.50 10,500 2.9513 C
9 300 0.1370 8.00 2,400 0.6746 C
10 29,000 13.2420 0.40 11,600 3.2605 C
11 11,500 5.2512 7.10 81,650 22.9502 A
12 4,100 1.8721 6.20 25,420 7.14151 B
2,19,000 100 3,55,770 100

Solution – 51
Classification of the items of inventory as per ABC analysis is as follows:
(1) 15 number of units of varieties of inventory items should be classified as ‘A’ category item
because of the following reasons:
(a) Constitute 0.375% of total number of varieties of inventory handled by stores, which is
minimum as per given classification in the table.
(b) 50% of total use value of inventory holding (average), which is maximum, according to given
table
(c) Highest in consumption, about 85% of inventory usage (in end-product).
(2) 110 number of varieties of inventory items should be classified as ‘B’ category item because of
the following reasons:
(a) Constitute 2.75% of the total number of varieties of inventory items handled by stores of
factory.
(b) Requires moderate investment of about 30% of total use value of inventory holding (average).
(c) Moderate in consumption, about 10% of inventory usage (in end product).
(3) 3,875 number of varieties of inventory items should be classified as ‘C’ category item because of
the following reasons:
(a) Constitute 96.875% of total varieties of inventory items handled by stores of factory.
(b) Requires about 20% of total use value of inventory holding (average).
(c) Minimum inventory consumption i.e. about 5% of inventory usage (in end product)

Material Cost
 CA Sunil Keswani 185
Solution – 52
Cost of raw material consumed = opening stock + Purchases – closing stock
= 90,000 + 2,70,000 – 1,10,000 = `2,50,000
$7-2/25Y10&'/25 VM,MMMYC,CM,MMM
Average stock of material = !
= !
= `1,00,000
G#\ +,(-./,0 1&2'3+-4 !,BM,MMM
Inventory turnover ratio (ITR) = #8-.,5- '(&19 &* +,(-./,0 = C,MM,MMM = 2.5 times
@AB @AB
Average number of days of inventory holding = EFG = !.B
= 146 days

Solution – 53

Particulars Material A Material B

Opening stock 10,000 9,000
Add: Purchases 52,000 27,000
Less: Closing stock (6,000) (11,000)
Material consumed (A) 56,000 25,000
Average stock [(Op + Cl)÷2] (B) 8,000 10,000
Inventory turnover rate (C = A ÷ B) 7 times 2.5 times
Number of days (365 ÷ C) 52 days 146 days

Solution – 54
(i) Calculation of Inventory Turnover Ratio
Particulars Material A Material B
Opening stock 30,000 32,000
Add: Purchases 90,000 51,000
Less: Closing Stock 20,000 14,000
Raw Material Consumed (A) 1,00,000 69,000
Average Stock @M,MMMY!M,MMM @!,MMMYCU,MMM
= 25,000
! !
= 23,000
$7-2/25Y%0&'/25
" !
& (B)
Inventory Turnover Ratio (ITR) C,MM,MMM AV,MMM
!B,MMM
= 4 times !@,MMM
= 3 times
@AM @AM
Number of days (360 ÷ ITR) = 90 days = 120 days
U @
(ii) Material A is moving faster than Material B.

Material Cost
 CA Sunil Keswani 186
Solution – 55
(i) Calculation of turnover ratio
Particulars Material M Material N
Turnover Ratio A,MM,MMMYV,BM,MMMXU,BM,MMM CM,MM,MMMYCO,UM,MMMXN,!B,MMM
(A,MM,MMMYU,BM,MMM)/!
=2.09 (CM,MM,MMMYN,!B,MMM)/!
=2.45
%&'( &* '(&19 &* +,(-/.,0 1&2'3+-4
" #8-.,5- '(&19 &* +,(-./,0
&

Average number of days for @AM @AM

!.MV
= 172.25 days !.UB
= 146.94 days
which the average inventory is
held
@AM
"E28-2(&.; F3.2&8-. G,(/&&
(ii) Advise
On comparing the two, it can be said that Material M is slow moving as compared to Material N
because of having higher inventory holding period of 172.25 days. Since the inventory holding period
is high in both case then the exact decision should be taken by comparing the same with the industry
standards.

Solution – 56
Statement of Cost
Particulars Chemical A Chemical B
Purchase price 1,00,000 1,04,000
Add: Basic custom duty @10% 10,000 10,400
(+) Railway freight 2,133 1,707
(`3,840 in ratio of 5:4 i.e. quantity purchased)
Total Cost (A) 1,12,133 1,16,107
Quantity Purchased 10,000 8,000
(-) Normal breakage (500) (320)
9,500 7,680
(-) Provision for detonation @ 2% (190) (153.6)
Net Quantity (B) 9,310 7,526.4
Total cost per kg (A ÷ B) 12.04 15.43

Solution – 57
Computation of probability of stock out
Stock-out (units) 100 80 50 20 10 0 Total
No. of times 2 5 10 20 30 33 100
Probability 0.02 0.05 0.10 0.20 0.30 0.33 1.00

Material Cost
 CA Sunil Keswani 187
Statement showing determination of Optimal Stock
Safety Expected Expected
Stock Stock-out annual stock out annual stock out Annual Total annual
Units units Prob. units costs holding cost expected cost
100 0 0 0 0 5,000 5,000
80 20 0.02 0.4 60 4,000 4,060
1.0 150
50 0.02
50 1.5 225 2,500 2,875
30 0.05
2.5 375
1.6 240
80 0.02
3 450
20 60 0.05 1,000 2,140
3 450
30 0.10
7.6 1,140
1.8 270
90 0.02
3.5 525
70 0.05
10 4.0 600 500 2,195
40 0.10
2.0 300
10 0.20
11.3 1,695
100 0.02 2 300
80 0.05 4 600
50 0.10 5 750
0 0 2,700
20 0.20 4 600
10 0.30 3 450
18 2,700
It is recommended to maintain safety stock level of 20 units at which total cost is least i.e. `2,140.

Solution – 58
(a) Stores Ledger (Weighted Average Basis)
Receipts Issues Balance
Date Qty. Rate Amou Qty. Rate Amou Qty. Rate Amou
(kg) (` ) nt (kg) (` ) nt (kg) (`) nt
1-4-19 - - - - - - 1,000 15 15,000
4-4-19 3,000 16 48,000 - - - 4,000 15.75 63,000
8-4-19 - - - 1,000 15.75 15,750 3,000 15.75 47,250
15-4-
1,500 18 27,000 - - - 4,500 16.50 74,250
19
20-4-
- - - 1,200 16.50 19,800 3,300 16.50 54,450
19

Material Cost
 CA Sunil Keswani 188
25-4-
- - - 300 18 5,400 3,000 16.35 49,050
19
26-4-
- - - 1,000 16.35 16,350 2,000 16.35 32,700
19
28-4-
500 17 8,500 - - - 2,500 16.48 41,200
19
30-4-
- - - 50 16.48 824 2,450 16.48 40,376
19

(b) Stores Ledger (LIFO)

Receipts Issues Balance
Date Qty. Rate Amou Qty. Rate Amou Qty. Rate Amou
(kg) (` ) nt (kg) (` ) nt (kg) (`) nt
1-4-19 - - - - - - 1,000 15 15,000
1,000 15 15,000
4-4-19 3,000 16 48,000 - - -
3,000 16 48,000
1,000 15 15,000
8-4-19 - - - 1,000 16 16,000
2,000 16 32,000
1,000 15 15,000
15-4-
1,500 18 27,000 - - - 2,000 16 32,000
19
1,500 18 27,000
1,000 15 15,000
20-4-
- - - 1,200 18 21,600 2,000 16 32,000
19
300 18 5,400
25-4- 1,000 15 15,000
- - - 300 18 5,400
19 2,000 16 32,000
26-4- 1,000 15 15,000
- - - 1,000 16 16,000
19 1,000 16 16,000
1,000 15 15,000
28-4-
500 17 8,500 - - - 1,000 16 16,000
19
500 17 8,500
1,000 15 15,000
30-4-
- - - 50 17 850 1,000 16 16,000
19
450 17 7,650

(ii) Value of Material Consumed and Closing Stock

Weighted Average LIFO Method
Method (`) (` )
Opening stock as on 01-04-2019 15,000 15,000

Material Cost
 CA Sunil Keswani 189
Add: Purchases 83,500 83,500
Less: Return to supplier (5,400) (5,400)
Less: Abnormal loss (824) (850)
Less: Closing stock as on 30-04-2019 (40,376) (38,650)
Value of material consumed 51,900 53,600

Solution – 59
(A) Statement of receipts and issues using FIFO
Receipts Issues Balance
Date Qty. Rate Amou Qty. Rate Amou Qty. Rate Amou
(kg) (` ) nt (kg) (` ) nt (kg) (`) nt
1-4-23 - - - - - - 100 5 500
100 5 500
5-4-23 300 6 1800 - - -
300 6 1800
100 5 500
6-4-23 - - - 150 6 900
150 6 900
150 6 900
8-4-23 500 7 3500 - - -
500 7 3500
10-4- 150 6 900
- - - 250 7 1750
23 250 7 1750
12-4- 250 7 1750
600 8 4800 - - -
23 600 8 4800
14-4- 250 7 1750
- - - 350 8 2800
23 250 8 2000
The value of material consumed = (500 + 900) + (900 + 1750) + (1750 + 2000) = `7,800
Balance of material as on 15-4-2023 = `2800

Statement of receipts and issues using LIFO

Receipts Issues Balance
Date Qty. Rate Amou Qty. Rate Amou Qty. Rate Amou
(kg) (` ) nt (kg) (` ) nt (kg) (`) nt
1-4-23 - - - - - - 100 5 500
100 5 500
5-4-23 300 6 1800 - - -
300 6 1800
100 5 500
6-4-23 - - - 250 6 1500
50 6 300
100 5 500
8-4-23 500 7 3500 - - - 50 6 300
500 7 3500

Material Cost
 CA Sunil Keswani 190
100 5 500
10-4-
- - - 400 7 2800 50 6 300
23
100 7 700
100 5 500
12-4- 50 6 300
600 8 4800 - - -
23 100 7 700
600 8 4800
100 5 500
14-4- 50 6 300
- - - 500 8 4000
23 100 7 700
100 8 800
The value of material consumed = 1,500 + 2,800 + 4,000 = `8,300
Balance of material as on 15-4-2023 = 500 + 300 + 350 + 800 = `2,300

(B) On 6-4-2023, 250 units were issued to production. Under FIFO their value comes to `1,400 and
under LIFO its `1,500. Hence, `100 more was charged to production under LIFO.

On 10-4-2023, 400 units were issued to production. Under FIFO their value comes to `2,650
and under LIFO its `2,800. Hence, `150 more was charged to production under LIFO.

On 14-4-2023, 500 units were issued to production. Under FIFO their value comes to `3,750
and under LIFO its `4,000. Hence, `250 more was charged to production under LIFO.

Thus, the total excess amount charged to production under LIFO comes to `500.

The difference of `500 (2,800 – 2,300) in value of closing stock is due to following reasons:
(a) In case of FIFO, all the 350 units of the closing stock belongs to the purchase of material
made on 12-4-2023, whereas under LIFO these units were from opening balance and
purchases made on 5-4-2023, 8-4-2023 and 12-4-2023.
(b) Due to different purchase price paid by the concern on different days of purchase, the value
of closing stock differed under FIFO and LIFO. Under FIFO 350 units of closing stock were
valued @ `8 per unit whereas under LIFO first 100 units were valued @`5 per unit, next
50 units @`6 per unit, next 100 units @`7 per unit and last 100 units@`8 per unit.

Material Cost
 CA Sunil Keswani 191
Solution – 60

Dat Receipts Issues Balance

e
Sep Qty. Rate Amoun Qty. Rate Amoun Qty. Rate Amoun
. (kg) (` ) t (kg) (`) t (kg) (` ) t
17,10,0
1 - - - - - - 6,000 285.00
00
13,89,3 3,20,62
8 - - - 4,875 285.00 1,125 285.00
75 5
48,30,0 51,50,6
9 17,500 276.00 - - - 18,625 276.54
00 25
33,18,4 18,32,1
10 - - - 12,000 276.54 6,625 276.54
80 45
6,56,78 24,88,9
12 2,375 276.54 - - - 9,000 276.54
3 28
25,92,0 50,80,9
15 9,000 288.00 - - - 18,000 282.27
00 28
2,01,60 48,79,3
17 - - - 700 288.00 17,300 282.04
0 28
26,79,3 21,99,9
20 - - - 9,500 282.04 7,800 282.04
80 48
2,53,83 19,46,1
30 - - - 900* 282.04 6,900 282.04
6 12
19,46,1
30 - - - 300** - - 6,600 294.87
12
*900 units is abnormal loss, hence it will be transferred to costing P&L account.
**300 units is normal loss, hence it will be absorbed by good units.

Solution – 61
Assumption – No opening stock on 1st January
Materials cost and control
Month Opening balance Purchase Issued Units (`) Closing Balance
January Nil 200 Nil 200
February 200 300 250 250
March 250 425 300 375
April 375 475 550 300
May 300 500 800 Nil
June Nil 600 400 200

Material Cost
 CA Sunil Keswani 192
At the end of May, there was no closing stock, i.e. no opening stock on June. But there was closing
stock of 200 units at the end of June.
Value of closing stock at the end of June:
FIFO – 200 units @ `20 = `4,000
LIFO – 200 units @ `20 = `4,000
Weighted average – 200 units @ `20 = `4,000
Hence the argument of the Chief Accountant is correct. He is correct only in the above case. If there
was closing stock at the end of May, the argument of the Chief Accountant would not have been
correct.

Solution – 62
Statement of receipts and issues using FIFO
Receipts Issues Balance
Date Qty. Rate Amou Qty. Rate Amou Qty. Rate Amou
(kg) (` ) nt (kg) (`) nt (kg) (`) nt
Jan 1 100 1 100 - - - 100 1 100
Jan 100 1 100
100 2 200 - - -
20 100 2 200
Jan 40 1 40
- - - 60 1 60
22 100 2 200
Jan 40 1 40
- - - 80 2 160
23 20 2 40

Statement of receipts and issues using LIFO

Receipts Issues Balance
Date Qty. Rate Amou Qty. Rate Amou Qty. Rate Amou
(kg) (` ) nt (kg) (`) nt (kg) (`) nt
Jan 1 100 1 100 - - - 100 1 100
Jan 100 2 200
100 2 200 - - -
20 100 1 100
Jan 40 2 80
- - - 60 2 120
22 100 1 100
Jan 40 2 80
- - - 80 1 80
23 20 1 20

Material Cost
 CA Sunil Keswani 193
Statement of receipts and issues using Weighted Average
Receipts Issues Balance
Date Qty. Rate Amou Qty. Rate Amou Qty. Rate Amou
(kg) (` ) nt (kg) (`) nt (kg) (`) nt
Jan 1 100 1 100 - - - 100 1 100
Jan
100 2 200 - - - 200 1.50 300
20
Jan
- - - 60 1.50 90 140 1.50 210
22
Jan
- - - 60 1.50 90 80 1.50 120
23

Statement of Required Data

FIFO (`) LIFO (`) Weighted Average (`)
Material for Job W16 60 120 90
Material for Job W17 80 100 90
Closing stock 160 80 120

Solution – 63

GRN Requisitio
Receipt Issue Balance
Date / n No.
MRN Qty Rate Amount Qty Rate Amount Qty Rate Amount
1 Sep - - - - - - - - 25 6.50 162.5
4 Sep - - - - 85 8 6.5 52 17 6.50 110.5
17 6.50 162.50
6 Sep 26 50 5.75 287.50 - - - -
50 5.75 287.50
5 6.50 32.50
7 Sep - - - - 97 12 6.50 78
50 5.75 287.50
5 6.50 32.50
10 Sep - - - - - 10 5.75 57.50
40 5.75 230
5 6.50 32.50
12 Sep - - - - 108 30 5.75 172.50
10 5.75 57.50
13 Sep - - - - 110 20 5.75 115 10 5.75 57.50
10 5.75 57.50
15 Sep 33 25 6.10 152.50 - - - -
25 6.10 152.50
17 Sep - - - - 121 10 5.75 57.50 25 6.10 152.50
25 6.10 152.50
19 Sep 38 10 5.75 57.50 - - - -
10 5.75 57.50

Material Cost
 CA Sunil Keswani 194
5 5.75 28.75
20 Sep 4 5 5.75 28.75 - - - - 25 6.10 152.50
10 5.75 57.50
5 5.75 28.75 20 6.10 122
26 Sep - - - - 146
5 6.10 30.50 10 5.75 57.50
18 6.10 109.80
30 Sep - - - - Shortage 2 6.10 12.20
10 5.75 57.50
Working Notes:
(a) The material received as replacement form vendor is treated as fresh supply
(b) In the absence of any information, the price of the material returned from a user department on
20 Sep has been taken at the price of the latest issue made on 17 Sep. In FIFO method, physical
flow of the material is irrelevant and issue price is based on first in first out.
(c) The issue of material on 26 Sep is made out of the material received from a user department on
20 Sep.
(d) The entries for transfer of material from one job to another on 22 Sep and 29 Sep do not affect
the store ledger. Hence no entries are passed in its respect.
(e) The material found short as a result of stock taking has been written off at relevant issue price.

Solution – 64
Ordering cost per order = 4,00,000 ÷ 320 = `1,250
Delivery cost per delivery = 1,35,000 ÷ 270 = `500
A = (1,250 ´ 100) + (500 ´ 70) = `1,60,000
B = (1,250 ´ 220) + (500 ´ 200) = `3,75,000

Solution – 65
(i) D – Monthly production of X = 30,000 kg
Raw material required = 30,000 ´ (5/3) = 50,000 kg
Material A = 50,000 ´ (3/5) = 30,000 kg
Material B = 50,000 ´ (2/5) = 20,000 kg
!×#223,0 1&2'3+7(/&2×$.4-. 1&'(
(ii) A – Economic Order Quantity (EOQ) = ! %,..;/25 1&'( 7-. 32/( 7.,.

!×(@M,MMM × C!)×C,!MM
Material A = ! CB%×@M
= 13,856 kg

!×(!M,MMM × C!)×C,!MM
Material B = ! B%×UU
= 16,181 kg
(iii) B – Since the material A is perishable in nature and it required to be used within 10 days, hence,
the maximum stock level shall be lower of two:
@M,MMM
(1) Stock equal to 10 days consumption = !B
× 10 𝑑𝑎𝑦𝑠 = 12,000 kg
(2) Max level = ROQ + ROL – (Min. consumption ´ Min. time)

Material Cost
 CA Sunil Keswani 195
@M,MMM
= (Max consumption ´ Max time) + 2,400 – " !B
× 1&
@M,MMM
=" !B
× 2& + 2,400 – 1,200 = 16,200 kg
Therefore, maximum stock level will be 12,000 kg.
(iv) B – Calculation of savings/loss in Material A
Particulars OS = 15,000 kg OS = 13,856 kg
Annual consumption 30,000´12 = 3,60,000 30,000´12 = 3,60,000
No. of orders 3,60,000÷12,000 = 30 3,60,000÷12,000 = 30
Ordering cost (A) 1,200´30 = 36,000 1,200´30 = 36,000
Carrying cost (B) CB,MMM C@,OBA
!
´15%´27 = 30,375 !
´15%´30 = 31,176
Purchase cost (C) 3,60,000´27 = 97,20,000 3,60,000´30 =
1,08,00,000
Loss due to obsolescence 30´3,000´27 = 24,30,000 30´1,856´30 = 16,70,400
(D)
Total cost (A+B+C+D) 1,22,16,375 1,25,37,576
Purchasing of material A at present policy of 15,000 kg saves `3,21,201.
Notes: (1) Since, material gets obsolete after 10 days, the quantity in excess of 10 days
consumption i.e. 12,000 kg a fresh order needs to be given.
(2) Carrying cost is incurred on average stock of materials purchased
(3) The excess quantity of material becomes obsolete and loss has to be incurred.
(v) C – Minimum stock level = ROL – (Avg. consumption ´ Avg. period)
@M,MMM
= 2,400 – " !B
× 1.5&= 600 kg
@M,MMM
Re-order level = Max. consumption ´ Max. time = !B
× 2 = 2,400 kg

Material Cost