Model Test – IPCC
MATERIAL COSTING
SUGGESTED ANSWER
Qtn 1. About 50 items are required every day for a machine. A fixed cost of Rs. 50 per order is incurred for placing an order. The Inventory carrying cost per item amounts to Rs. 0.02 per day. The lead period is 32 days. Compute:
(i) Economic order quantity.
(ii) Re-order level.
Ans:
(i) EOQ =
√(2AB) / C
Where: A (ie. Annual consumption) = 50 items × 365 days = 18,250 items
B (Ordering cost per order) = Rs. 50
C (carrying cost per item per annum) = Rs. 0.02 × 365 = Rs. 7.30
EOQ =
√ 2 X 18,250 units X Rs. 50
Rs. 7.30
=500 units
(ii) Re-order level = Maximum usage per day × Maximum lead time
= 50 items per day × 32 days
= 1,600 items
Qtn 2. PQR limited produces a product which has monthly demand of 52,000 units. The product requires a component X which is purchased @ Rs.15/unit. For every finished product,2 units of component X are required. The ordering cost is Rs.350/order and the carrying cost is 12% p.a.
Required:
Ø Calculate the economic order quantity for component X.
Ø If the minimum lot size to be supplied is 52,000 units, what is the extra cost the company has to incur?
Ans:
1. EOQ = √ 2AB/C , Where
A = Annual requirement of RM = 52,000 X 12 months = 12,48,000 units.
B = Buying cost per order = Rs.350
C = Carrying cost per unit per annum = Rs.15 X 12% = Rs.1.80 p.u.p.a
EOQ = 22,030 units.
2. Cost Comparison of EOQ with purchase policy of 52,000 units:
| Particulars | Quantity ordered every time(a) | No. of Orders p.a (b) | Buying cost p.a @ Rs.350(c) | Average Inventory(d) = ½ of (a) | Carriying cost p.a @ Rs.1.80 (e) | Associated cost p.a = (c)+(e) |
| EOQ | 22,030 units | 12,48,000/22,030 =56.65 orders | 56.65 X Rs.350 = Rs.19,828 | ½ X 22,030 = 11,015 units | 11,015 X Rs.1.80 = Rs.19,827 | Rs.39,655 |
| Minimum lot size | 52,000 units | 12,48,000/52,000 = 24 orders | 24 X Rs.350 = Rs.8,400 | ½ X 52,000 = 26,000 units | 26,000 X Rs.1.80 =Rs.46,0800 | Rs.55,200 |
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