Model Test – IPCC – Material cost

Model Test – IPCC – Material cost

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.

(4 Marks)

 

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?

(4 Marks)

 

Qtn 3.

(vi) The following information relating to a type of raw material is available:

 

Annual demand           2,000 units                      storage cost             2% p.a

Unit price                     Rs.20                              interest rate             8% p.a

Ordering cost /order     Rs 20                              Lead time               ½ month

 

Calculate EOQ and total annual inventory cost of the raw material.

(4 Marks)

Qtn 4. Short notes on;-

1. Stores Layout
2. Stock Control Cards

(2*2 =4 Marks)

 

Qtn 5. Distinguish between Re-Order Level and Re-Order Quantity

(4 Marks)

 

Ans 1:

 

(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

 

 

Ans 2:

                    

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

Hence, additional cost by ordering 52,000 units every time = Rs.55,200- Rs.39,655 = Rs.15,545

 

Ans 3:

EOQ is calculated as under:

1. EOQ =  2AB/C, where	A = Annual requirement of RM = 2,000 units (given) B= Buying cost per order = Rs. 20 per order (given) C= carrying cost per unit per annum = Rs.20 X 10% (i.e. 2%+ 8%) = Rs.2.p.u.p.a   On substitution, EOQ = 200 units
2. Inventory carrying cost per unit per annum	= Average Inventory (i.e. ½ of EOQ) X carrying cost/unit/annum = 100 units X Rs.2.p.u.p.a = Rs.200
3. Associated costs p.a	= Buying cost p.a + carrying cost p.a = Rs.200 (see note) + Rs. 200 = Rs.400.   Note: At EOQ, buying cost p.a = carrying cost p.a

 

 

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Model Test – Final -TRANSFER PRICING

Model Test – Final

TRANSFER PRICING

                                                              SUGGESTED ANSWER

1. Division Z is a profit center which produces four products A, B, C and D. Each product is sold in the external market also. Data for the period is:

Particulars	A	B	C	D
Market price per unit (Rs.) Variable cost of pdn per unit (Rs.) Labour hours required per unit	150 130   3	146 100   4	140 90   2	130 85  3

 

Product D can be transferred to division Y but the maximum quantity that may be required for transfer is 2,500 units of D.

The maximum sales in the external market are:

                        A              2,800 units

                        B               2,500 units

                        C              2,300 units

                        D              1,600 units

Division Y can purchase the same product at a price of Rs.125 per unit from outside instead of receiving transfer of product D from Division Z.

 

What should be the transfer price for each unit for 2,500 units of D, if the total labour hours available in division Z are 20,000 hours?

 

Solution:

Ranking of products when availability of time is the key factor

Particulars	A	B	C	D
Market price Less: Variable cost Contribution p.u(Rs) Labour hours p.u Contribution /labour hour Ranking Maximum demand (units) Total hours Allocation of 20,000 hours on the basis of ranking	150 130   20   3  6.67    IV 2,800 8,400 600 *	146 100 46  4 11.5    III 2,500 10,000 10,000	140 90 50  2 25  II 2,300 4,600 4,600	130   85  45   3  15    I 1,600 4,800 4,800

* Balancing figure

Note: Time required for meeting demand of Rs.2, 500 of product D for division Y is 7,500 hours. This requirement of time for providing 2,500 units of product D for division Y can be met by sacrificing 600 hours of product A (200 units) and 6,900 hours of product B(1,725 units)

 

Transfer price = variable cost + opportunity cost

                       =  Rs.85+(Rs.6,900 X 11.5 + 600x6.66)

                                                    2500

                            = Rs.85 + (79350 + 4000)  = Rs(85+33.34) = Rs.118.34

                                                    2500

2. P Ltd has three divisions – X, Y and Z, which makes products X, Y and Z respectively. For division Y, the only direct material is product X and for Z, the only direct material is product Y. Division X purchases all its raw material from outside. Direct selling overhead representing commission to external sales agent is avoided on all internal transfers. Division Y additionally incurs Rs.10 per unit and Rs.8 per unit on units delivered to external customers and Z respectively. Y also incurs Rs.6 per unit picked up from X, whereas external suppliers supply at Y's factory at the stated price of Rs. 85 per unit.

 

Additional information is given below:

 

                                                                                    Figures Rs/unit

                                                                                 X                                    Y                     Z

Direct materials (external supplier rate)                  40                      85                   135

Direct labour                                                             30                      50                     45

Sales Agent's commission                                          15                      15                     10

Selling price in external market                             110                    170                   240

Production capacity (units)                                  20,000              30,000               40,000

External demand (units)                                      14,000               26,000               42,000

 

You are required to discuss the range of negotiation for Managers X,Y and Z for the number of units and the transfer price for internal transfers.    

 

Answer:

 

Analysis of range of negotiation for manager of Division X

                                                                                                                       (Figures in Rs.)

(a)                                                       Division X

                                                   

  

 

 

                                  Outside sales                                 Sales to Y (Range)

 

    Selling price                              110                  70           ----         79

(-) Commission                               15                   --                           --

   Net selling price                           95                  70                          79

    Variable Cost                              70                   70                          70

   Contribution per unit                    25                   0                            9

   Units                                         14,000              6,000                    6,000

   Total contribution

  (Units X contribution per unit)    3,50,000             0                      54,000

 

Analysis of Range of negotiation for Manager of Division Y

Division Y

 

  

                             Outside sales                                      Sale to Z

                                              

                              From A      From outside                     From A   From outside

Price range          ----    70       79          85                           70         79          85

Add: Transport               6         6           --                             6           6           -- 

                                       76      85          85                           76         85          85

Add: Direct labour         50      50          50                           50         50          50      

                                       126   135        135                         126       135        135

 

Add: Delivery cost           10     10          10                            8            8            8

                                        136   145       145                         134        143       143    

Add: Sales commission    15      15        15                            -             -           -  

Total cost                        151   160        160       134           134         143       143

Selling price                    170   170        170       134           135         135       135  

Contribution                      19     10         10          0              +1           -8          -8

 

Range of negotiation:

Manager of Division X will sell 14,000 units outside at 110 per unit and earn a contribution of Rs.3.5 lakhs.

 

Excess capacity of 6,000 units can be offered to Y at a price between 70( Th variable manufacturing cost at X) and Rs.95 (the maximum amount to equal outside contribution). But Y can get the material outside @ 85. So, Y will not pay to X anything above (Rs.85 -6) = Rs.79 to match available external price.

X will be attracted to sell to Y only in the range of 71 – 79 Rs.per unit at a volume of 6,000 units. At Rs.70, X will be indifferent, but may offer to sell to Y to use idle capacity.

 

Z will not buy from Y at anything above Rs.135. If X sells to Y at 70 per unit, Y can sell to Z at 134 and earn no contribution, only for surplus capacity and if units transferred by X to Y at Rs.70 per unit.

	Y	Z
Provided X sells to Y at Rs.70 per unit	Sells 4,000 units to Z at 134(Indifferent)	Buy 4,000 units from Y at 134(attracted)
	Sells 4,000 units to Z at 135 (Willing for a contribution of Re.1)	Indifferent, since market price is also 135

 

For buying from X at 71-79 price range, Y will be interested in selling to Z only at price 136-143, which will not interest Z.

Thus Y will sell to Z only if X sells to Y at Rs.70 per unit and Y will supply to Z maximum 4,000 units.

Model Test – IPCC - Labour costing

Model Test – IPCC

LABOUR COSTING

SUGGESTED ANSWER

 

1. A skilled worker in XYZ Ltd. is paid a guaranteed wage rate of Rs. 30 per hour. The standard time per unit for a particular product is 4 hours. Mr.Been, a machineman, has been paid wages under the Rowan Incentive Plan and he had earned an effective hourly rate of Rs. 37.50 on the manufacture of that particular product. What could have been his total earnings and effective hourly rate, had been put on Halsey Incentive Scheme (50%) ?

 

Ans:

 

Let T hours be the total time worked in hours by the skilled worker (machineman P); Rs. 30/- is the rate per hour; standard time is 4 hours per unit and effective hourly earning rate is Rs. 37.50 then

 

Earnings = Hours worked × Rage per hour + (Timesaved /Time allowed ) × Time taken × Rate per hour

(Under Rowan incentive plan)

Rs. 37.5 T = T × Rs. 30 + [(4-T) /4 ] × T × Rs. 30

Rs. 37.5 = Rs. 30 + (4 – T) × Rs. 7.5

Or Rs. 7.5 T = Rs. 22.5

Or T = 3 hours

Total earnings and effective hourly rate of skilled worker (machineman P) under Halsey Incentive Scheme (50%)

 

Total earnings = Hours worked × Rate per hour + ½  Time saved × Rage per hour

(Under 50% Halsey incentive Scheme)

= 3 hours × Rs. 30 + ½ × 1 hour × Rs. 30 = Rs. 105

 

Effective hourly rate = ( Time earnings/Time Allowed)

                                    Rs.105/3hrs

                                    = Rs.35

 

2.  Standard output in 10 hours is 240 units; actual output in 10 hours is 264 units. Wages rate is Rs.10 per hour. Calculate the amount of bonus and total wages under Emerson Plan.

 

Answer:

(i) Efficiency = Actual output / standard output, 264/240 = 110%

(ii) Since efficiency  ≥ 100%, total wages under Emerson plan is calculated using the formulae:

Total wages = 120% of Time rate + 1% Bonus for every 1% increase in efficiency

                                                                                          beyond 100%

                    = {(10 hrs X Rs.10 per hour) X 120%] + 10% Bonus on Rs.10 per hour for 10 hrs

                    = Rs.120 + Rs.10 = Rs.130