Certificate in Accounting and Finance

B
Cost and management accounting

SECTION
Answers

CHAPTER 1 – INVENTORY VALUATION

1.1 STEEL RODS

(a) FIFO
Receipts Issues
Date Quantity Price Date Quantity Price Amount
Rs. Rs. Rs.
1 Feb 10 600 3 Feb 2 600 1,200
2 Feb 3 550 6 Feb 3 600 1,800
5 Feb 2 560 12 Feb 5 600 3,000
10 Feb 8 555 12 Feb 3 550 1,650
15 Feb 2 555 16 Feb 2 560 1,120
20 Feb 5 560 25 Feb 7 555 3,885

Balance = (1  555) + (2  555) + (5  560) = Rs.4,465

(b) Weighted average
Date Quantity Price Total
Rs. Rs.

1 February 10 600.0 6,000

2 February 3 550.0 1,650
13 588.5 7,650
3 February (2) 588.5 (1,177)
11 588.5 6,473
5 February 2 560.0 1,120
13 584.1 7,593

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Cost and management accounting

6 February (3) 584.1 (1,752)

10 584.1 5,841
10 February 8 555.0 4,440
18 571.2 10,281
12 February (8) 571.2 (4,569)
10 571.2 5,712
15 February 2 555.0 1,110
12 568.5 6,822
16 February (2) 568.5 (1,137)
10 568.5 5,685
20 February 5 560.0 2,800
15 565.6 8,485
25 February (7) 565.6 (3,960)
8 565.6 4,525

Balance = 8  565.6 = Rs.4,525

1.2 XYZ LIMITED

A B C D
Units
Opening stock 10,000 15,000 20,000 25,000
Production during the period A 50,000 60,000 75,000 100,000
Goods available for sale B 60,000 75,000 95,000 125,000
Closing Stock C (5,000) (10,000) (15,000) (24,000)
Sale D 55,000 65,000 80,000 101,000
Cost of goods available for sale: Rupees
Opening stock valuation at lower of
70,000 110,000 180,000 300,000
cost and NRV)
Cost of production for the period E 400,000 600,000 825,000 1,200,000
Cost of goods available for sale F 470,000 710,000 1,005,000 1,500,000

Closing stock cost

A & B (W/Avg.): F/B×C 39,167 94,667
G{
C & D (FIFO): E/A×C 165,000 288,000
Selling expenses - current year H 60,000 80,000 90,000 100,000
Sales price - per unit I 10.0 12.0 12.0 12.5

Total sales price of closing C

stock ×I 50,000 120,000 180,000 300,000
Selling costs H / D × C × 1.1 (6,000) (13,538) (18,563) (26,139)
Repair cost of damaged units (900) (1,200) (2,000) (5,250)
NRV of Closing stock 43,100 105,262 159,438 268,611

Value of closing stock (At lower of

cost and NRV) 39,167 94,667 159,438 268,611

© Emile Woolf International 84 The Institute of Chartered Accountants of Pakistan

 Answers

1.3 MEHANTI LIMITED

Chemical Bee: Litres
Stock as per records [ 1,000 + 420 + 500 – 560 – 300 – 250 – 500] 310
Add:
- 150 litres held on behalf of customer 150
- Inventory received after cut-off date taken in count 250
- Return from production process not recorded 100
Less:
- Adjustment for contaminated stock (95)
- Adjustment for incorrect recording (180)
Physical balance 535

Chemical Gee:
Stock as per records [ 500 + 450 + 700 + 250 – 650 – 300 – 150 – 450] 350
Add:
- Inventory issued after stock count 95
- No adjustment for stock returned after month end 0
Less:
- 100 litres were held by supplier on ML's behalf. (100)
- Adjustment for contaminated stock (105)
- Adjustment for incorrect recording (100)
Physical balance 140

Cost of chemical Bee:

Stock as per records 310
- Return from production process not recorded 100
- Adjustment for contaminated / damaged stock (95)
- Adjustment for incorrect recording (180)
Actual quantity present in stock 135
Rate (W1) 54.23
Cost of closing stock as at 31 May 20X3 (Rs.) 7,321

W1: Working for rate of closing stock of chemical Bee:

Litres Rate Amount
Balance as of 09-05-20X3 [1000 – 560 – 300] 140 50.00 7,000
Add: Actual purchases on 12-05-20X3 240 52.00 12,480
380 51.26 19,480
Less: Issuance on 18-05-20X3 (250) 51.26 (12,816)
130 51.26 6,664
Add: Actual purchases on 24-05-20X3 500 55.00 27,500
630 54.23 34,164

Cost of chemical Gee:

Stock as per records 350
- Adjustment for contaminated / damaged stock (105)
- Adjustment for incorrect recording (100)
- Actual quantity present in stock 145
Rate (W2) 116.93
16,955

© Emile Woolf International 85 The Institute of Chartered Accountants of Pakistan

Cost and management accounting

W2: Working for rate of closing stock of chemical Gee:

Litres Rate Amount
Balance as of 1-5-20X3 500 115 57,500
Add: purchases on 2-5-20X3 450 110 49,500
950 112.63 107000
Less: Issued on 5-5-X3 and 9-5-X3 (650+300) 950 112.63 107000
0 0 0
Add: purchases on 12-5-20X3 700 115.00 80,500
Less: Issuance on 18-05-20X3 (150) 115.00 (17,250)
550 115.00 63,250
Add: Actual purchases on 24-05-20X3 150 124.00 18,600
700 116.93 81,850

Contaminated chemical Bee 95 20 1,900

Contaminated chemical Gee 105 50 5,250

© Emile Woolf International 86 The Institute of Chartered Accountants of Pakistan

 Answers

CHAPTER 2 - INVENTORY MANAGEMENT

2.1 STOCK ITEMS 6786 AND 6787

2  220  15,000
(a) (i) EOQ  = 4,062 units
0.40
(ii) If the annual holding cost per unit increases to more than Rs.0.40 per
unit, the EOQ will become smaller.
If the EOQ is smaller, there will be more orders each year; therefore total
annual ordering costs will increase.
(b) Reorder level to avoid inventory-outs
= Daily demand × Maximum lead time
= 300 units × 20 days
= 6,000 units.

2.2 INVENTORY CONTROL

(a) The annual holding cost per unit of inventory = Rs.4 + (2% × Rs.150) = Rs.7.
Annual demand = 52 weeks × 105 units = 5,460 units.
2  390 5,460
EOQ  = 780 units.
7
(b) A discount on the price is available for order sizes of 2,000 units or more,
which is above the EOQ.
 The order size that minimises cost is therefore either the EOQ or the minimum
order size to obtain the discount, which is 2,000 units.
Order size Order size
Annual costs 780 units 2,000 units
Rs. Rs.
Purchases
(5,460 × Rs.150): ((5,460 × Rs.150 × 99%) 819,000 810,810
Holding costs 2,730 7,000
(Rs.7 × 780/2): (Rs.7 × 2,000/2)
Ordering costs 2,730 1,065
(Rs.390 × 5,460/780): (Rs.390 × 5,460/2,000)
Total costs 824,460 818,875
Conclusion
The order size that will minimise total annual costs is 2,000 units.

© Emile Woolf International 87 The Institute of Chartered Accountants of Pakistan

Cost and management accounting

2.3 ALPHA MOTORS (PVT.) LTD

(i) Computation of EOQ and Ordering Costs

2 x 162,000 x 27,000
EOQ =
300
EOQ = 5,400 gaskets
Number of orders = 162,000 / 5,400 = 30 Orders
Ordering costs = 30 x Rs. 27,000 = Rs. 810,000
(ii) Safety stock required to be maintained at 20% and 10% risk level
Risk Level
20% 10%
Number of days stock required to be maintained 1 day 2 days
Safety stock
1 x 450 (W-1) 450
2 x 450 (W-1) 900
(W-1)
Average stock requirements per day = Annual Demand ÷ 360 days
= 162,000 ÷ 360 days
= 450
Re-order level at 20% and 10% risk level
Re-order level = (Normal consumption x Normal Lead time) + Safety Stock
Re-order level at 20% = (450 x 11) + 450 = 5,400 gaskets
Re-order level at 10% = (450 x 11) + 900 = 5,850 gaskets

2.4 ABC
Computation of annual requirement
Units sold on cash basis 600,000
Units sold on credit basis 1,200,000
Ending Inventory (1.8 million x 15/300) 90,000
Annual purchases 1,890,000

Computation of Carrying Cost per unit

Carrying cost per unit (Rs. 450 × 98% × 16%) (Bulk quantity discount
availed) Rs. 70.56

Computation of EOQ
2  1,890,000  300
EOQ =
70.56
= 4,009 units
Estimated carrying cost = (EOQ/2) × carrying cost per unit
= 4,009/2 × 70.56
= Rs. 141,438
Add: Godown rent p.a. = Rs. 120,000
Total carrying cost = Rs. 261,438
Estimated ordering cost = (annual requirement / EOQ) × cost per order
= (1,890,000 / 4,009) × 300
= 141,432

© Emile Woolf International 88 The Institute of Chartered Accountants of Pakistan

 Answers

2.5 KARACHI LIMITED

(a)
(i) Karachi Limited
Price per football A 400 390 380 370 360
Annual purchases (nos.) B 24,000 24,000 24,000 24,000 24,000
9,600,00 9,360,00 9,120,00 8,880,00 8,640,00
Purchase cost A×B
0 0 0 0 0
Minimum order size C 2,000 3,000 4,000 6,000 8,000
No. of orders (B÷C) D 12.00 8.00 6.00 4.00 3.00
D×
Ordering cost 24,000 16,000 12,000 8,000 6,000
2,000
1.00 +
(hired
Trips per order (C÷2,000) E 1.00 2.00 3.00 4.00
transport
)
Total no. of trips (D×E) F 12.00 8.00 12.00 12.00 12.00
F×15,00
Transportation cost 180,000 120,000 180,000 180,000 180,000
0
8,000
Hired transportation cost 72,000
units×9
Average inventory (C÷2) G 1,000 1,500 2,000 3,000 4,000
Inventory carrying cost G × 80 80,000 120,000 160,000 240,000 320,000
9,884,00 9,688,00 9,472,00 9,308,00 9146,00
Total cost Rs.
0 0 0 0 0

(ii) The most economical option is to purchase 3 lots of 8,000 footballs each
against the existing purchases of 12 lots of 2,000 footballs. The saving will be
as under:
Cost for 12 lots of 2,000 footballs each. 9,884,000
Cost for 03 lots of 8,000 footballs each. 9,146,000
Cost saving Rs. 738,000
(b) (i) Stock out Costs:
These costs result from not having enough inventories in stock to meet
customers' needs. These costs include lost sales, customers’ ill will,
and the costs of expediting orders for goods not in stock.
(ii) Lead Time:
The time period between placing an order till the receipt of the goods
from suppliers is called lead time.
(iii) Reorder Point:
The point of time when an order is required to be placed or production
to be initiated to replenish depleted stocks is called reorder point. It is
determined by multiplying the lead time and average usage.
(iv) Safety Stock:
To minimize stock outs on account of increased demand or delays in
delivery etc., a buffer stock is often maintained. Such a buffer stocks is
called Safety stock.

© Emile Woolf International 89 The Institute of Chartered Accountants of Pakistan

Cost and management accounting

2.6 MODERN DISTRIBUTORS LIMITED

Purchase department’s variable cost: Rs. 4,224,000

Costs applicable to product CALTIN - 10% of above Rs. 422,400

Ordering costs per purchase order

Annual purchases of CALTIN (tons) [240,000 x 32.5%) Tons 78,000
Existing size of purchase order (tons) Tons 6,500
No. of orders (78,000 / 6,500) Orders 12
Ordering cost per order (422,400/12) Rs. 35,200

Carrying costs per ton (22,125 / 1.25 x 1% ) Rs. Per Ton 177

2  78,000 tons x 35,200

Computation of EOQ  5,570 tons
177
Marks EOQ Existing
Demand of CALTIN Tons 78,000 78,000
Order quantity Tons 5,570 6,500
No. of orders 14 12
Average inventory excluding buffer stock (order
quantity / 2) Tons 2,785 3,250
Buffer stock Tons 2,000 2,000
Average inventory Tons 4,785 5,250
Cost of placing orders (Rs 35,200 per order) Rupees 492,800 422,400
Carrying cost ([Avg. Inventory x Rs. 177) Rupees 846,945 929,250
Total costs Rupees 1,339,745 1,351,650

Savings on adoption of EOQ Rupees 11,905

2.7 ROBIN LIMITED

Average stock level:
Average stock level = minimum level + ½ (reorder quantity)
As minimum level is not given it will be computed as follows:
Re-order level = maximum usage × maximum lead time
Re-order level = 300 × 6 = 1,800 units.
Minimum level = Re-order level – ( average usage × average lead time)
Minimum level = 1,800 – (225 × (6+2/2) = 900 units.
Therefore, Average stock level = 900 + (½ 750) = 1,275 units.

© Emile Woolf International 90 The Institute of Chartered Accountants of Pakistan

 Answers

2.8 ORE LIMITED

PRESENT SCENARIO
Carrying cost per unit: Rupees
Storage costs 80
Insurance cost 60
Store keepers salary -
Cost relating to final quality check -
Opportunity cost of capital (per pair) [ Rs. 1,000 – 100 x 0.15] 135
275
COSTS ASSOCIATED WITH EACH ORDER
Ordering cost per order 8,000
Delivery cost per order 3,000
11,000

√ √ √

EOQ = 4,000
Number of orders = 50

Total relevant costs under present scenario

Purchase price (200,000  Rs.900) 180,000,000
Total ordering cost (50 × Rs.11,000) 550,000
Total carrying cost (4,000/2 × Rs.275) 550,000
181,100,000

IF DISCOUNT IS TAKEN
Carrying cost per unit
Storage costs 80.00
Insurance cost 60.00
Opportunity cost of capital [ Rs. 900 x (1- 0.03) x 0.15] 130.95
270.95
Number of orders would be (200,000 / 5,000) 40

Total relevant costs:

Purchase price [Rs. 900 x (1-.03) x 200,000] 174,600,000
Total ordering cost [ Rs. 11,000 x 40] 440,000
Total carrying cost [ Rs. 270.95 x 5,000 /2] 677,375
175,717,375

Conclusion: Quantity discount should be taken.

© Emile Woolf International 91 The Institute of Chartered Accountants of Pakistan

Cost and management accounting

2.9 EXPLAIN
Inventory control:
Inventory control can be defined as the system used in an organization to control
its investment in inventory/stocks. I.e. the overall objective of inventory control is
to minimize, in total, the costs associated with stock.
This includes; the recording and monitoring of stock levels, forecasting future
demands and deciding when and how many to order.
The method of stock valuation which should be used in times of fluctuating
prices:
Weighted Average stock valuation method should be used in times of fluctuating
prices because this method is rational, systematic and not subject to
manipulation. It is representative of the prices that prevailed during the entire
period rather than the price at any particular point in time. It is because of this
smoothening effect that this method should be used for stock valuation in times of
fluctuating prices.

© Emile Woolf International 92 The Institute of Chartered Accountants of Pakistan