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MATERIALS COST
1) Multiple Choice Questions 1) Continuous stock taking is part of (a) Annual stock taking
(b) Perpetual inventory 10
COST
T.Y. B.COM- COST ACCOUNTING-MATERIAL 2016-2017
(c) ABC analysis (d) None of the above 2) Which of the folloing is considered to be a nor!al loss of !aterial (a) "oss due to accidents (b) Pilferage (c) "oss due to careless handing of !aterial (d) "oss due to breaking the bulk #) Bin card is !aintained by the (a) Accounting depart!ent (b) Costing depart!ent (c) $tores (d) None of the above %) Which of the folloing assu!ptions are !ade for the calculation of econo!ic &rder 'uantity (a) Anticipated usage of !aterial in units is non (b) Cost per units of !aterial is constant and non (c) &rdering cost per order is fied (d) All the above *) Which of the folloing is an accounting record (a) Bill of +aterials (b) Bin card (c) $tores ledger (d) All of these ,) Which of the folloing docu!ents is used for issuing !aterials to production depart!ents (a) Purchase re-uisition note (b) $tores re-uilistion Note (c) .oods received Note (d) $tores Credit Note /) Which of the folloing !ethods of stock control ai!s at concentrating efforts on selected ite!s of !aterials0 (a) Perpetual inventory syste! (b) +aterials turnover (c) +ai!u! !ini!u! and reorder level setting (d) ABC analysis 3) 4he storekeeper should initiate a purchase re-uisition hen reaches (a) +ini!u! level (b) +ai!u! level (c) 5eorder level (d) Average level 6) A Written re-uest to a supplier for specified goods at an agreed upon price is called a7 (a) Purchase order (b) 5eceiving report (c) Purchase re-uisition (d) +aterials re-uisition for! 18) A Purchase re-uisition is raised (a) 4o inti!ate to the supplier the -uantity and -uality of !aterial re-uired (b) When the stock of ra !aterial has fallen to the recorder level (c) When goods are received fro! a supplier (d) 4o let the accounts depart!ent kno that an invoice should be epected fro! a supplier 11) 4he reorder level is (a) 4he nu!ber of units that should be ordered (b) 4he level inventory hen net order should be placed (c) 4he econo!ic order -uantity (d) Both (b) and (c) 12) 4he costs of preparing issuing and placing purchase order plus receiving and inspecting the 11
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9te!s in orders is (a) Purchasing costs (b) &rdering costs (c) $tock costs (d) Carrying costs 4he cost that result hen a co!pany holds an inventory of goods for sale (a) Purchasing costs (b) Carrying costs (c) &pportunity cost (d) 9nterest costs 4he costs associated ith storage are an ea!ple of hich cost category (a) 'uality costs (b) "abour costs (c) &rdering costs (d) Carrying costs 9f there is increase in the si:e of inventory orders Nu!ber of orders per year ill (a) 9ncrease (b) ;ecrease (c) 5e!ain sa!e (d) change depending on other factors 9f there is increase in the si:e of inventory orders< 4otal annual carrying costs ill (a) 9ncrease (b) ;ecrease (b) 5e!ain sa!e (d) Change depending on other factors 9f there is increase in the si:e of inventory orders< 4otal annual ordering cost ill (a) 9ncrease (b) ;ecrease (c) 5e!ain sa!e (d) change depending on other factors Continuous stock taking is a part of (a) Annual stock taking (b) Perpetual inventory (c) ABC analysis (d) 9nventory 4urnover ratio analysis +aterial control invoices control over (a) Consu!ption of control over (b) 9ssue of !aterial (c) Purchase of !aterial (d) Purchase storage and issue of !aterial Perpetual inventory syste! involves (a) Bin card and $tores ledger (b) Bill of !aterial and +aterial re-uisition (c) Purchase re-uisition and purchase order (d) 9nard and outard invoices B) ;) B) A)
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T.Y. B.COM- COST ACCOUNTING-MATERIAL 2016-2017
) +aster re-uisition # 9ssuing a !aterial ite! to production ) =irst step in purchase % ) * ) , ) Ans" #1$%)& #2$e)& #'$()& #$f)& #*$c)& #+$a)
d) e) f)
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2) Match the Te!,s in Colu,n A with State,ents in Colu,n - Colu,n A # Te!,) 1) +aterial 2) =inished product #) Purchase re-uisition %) 4he !ai!u! stock level *) @cono!ic order -uantity ,) +aterials return note /) Bill of !aterial 3) Perpetual inventory syste! 6) +ini!u! stock level 18) 5eorder levels Colu,n - #State,ent) a) +ai!u! consu!ption +ai!u! reorder period b) All the !aterial re-uired for a particular ob listed by the production depart!ent c) Consu!ed in the process of !anufacture d) $upplies do not beco!e a part of e) 4he first step in the purchase procedure f) +aintain !aterials at the opti!u! level at of its re-uire!ent returned to stores g) +ethod of knoing the stock of every ite! of !aterial at all ti!es h) 5eorder level (Nor!al consu!ption Nor!al reorder period) i) +aterials issued to a depart!ent in ecess of its re-uire!ent returned to stores ) Above hich the stock of that !aterial should not generally be alloed to go<
Ans<(1c) (2d) (#e) (%) (*f) (,i) (/b) (3g) (6h) (18a) ') State whethe! T!ue o! .alse 1) Purchase re-uisition note is prepared by the purchasing depart!ent< 2) Annual stock taking confir!s that the perpetual inventory is functioning property< #) Weighted average !ethod of pricing stores involves adding all the different prices and dividing by the nu!ber of such prices< %) Bin card shos the -uantity and value of a !aterial at any !o!ent of ti!e< *) +aterial losses due to careless handing resulting in breakage should be transferred to 1,
COST
T.Y. B.COM- COST ACCOUNTING-MATERIAL 2016-2017
Costing Profit and "oss A?c ,) Bill of +aterial is a cash !e!o sent by the supplier along ith the !aterials< /) $tore 5e-uisition Note is not perpetual inventory record< 3) When !ai!u! stock level is fied the stock in hand should never eceed this level< 6) 5eordering level is alays fied so!ehere beteen !ai!u! and !ini!u! stock levels 18) 4he @cono!ic order -uantity is the reorder -uantity< 11) a "ist of the !aterial and parts re-uired for a particular ob is called production order 12) Purchas control is eercised by the stockkeeper< 1#) Purchase order is prepared by the store depart!ent< 1%) +aterial re-uisition note is prepared by the stores depart!ent< 1*) =9=& !ethod of pricing results in higher profit during the period of falling prices< 1,) @cono!ic order -uantity is that order si:e at hich each of the ordering cost and carrying cost is !ini!u!< 1/) nder the ABC analysis of !aterial controls DAE stands or the highest nu!ber of ite!s< 13) 4ender fro! is issued by the purchasing depart!ent< 16) "ack of efficient !aterial control syste! increases the !aterial cost of the finished product< 28) A bill of !aterial gives a co!plete list of all !aterials re-uired ith -uantities for a particular ob< Ans< 4rue7 * / 6 18 1% 1* 13 16 28
=alse7 1 2 # % , 3 11 12 1# 1, 1/
Theo!/ Questions Q1) Mate!ial Cont!ol Ans" Meaning: !aterial control is defined by 9C+A as the function of ensuring that sufficient $tocks are retained in stock to !eet all re-uire!ents ithout carrying unnecessary stocks< +aterial control is the DE safeguarding of co!panyEs property in the for! of !aterial by a Proper syste! of recording and also to !aintain the! at the opti!u! level considering &perating re-uire!ents and financial resources of businessEE< +aterial control involves the Planning organi:ing and controlling the receipt issue and storage of !aterials so to as achieve the obectives of efficiency and econo!y< O%0ecties an( Advantages: ma"!&a+ c)n!)+ #a%&ca++$ a&m% ) "n%u!" a
a*"'ua" ))*% &n %)c8 ) m"" a++ !"'u&!"m"n% /&)u ca!!$&n unn"c"%%a!&+$ +a!" %)c8%. T" ma&n &bectives of !aterial control are as 1) 2) #) %) *) ,)
follos7 4o avoid under stocking i
carrying costs) 4o avoid astages and losses during storage and usage< 4o !aintain proper and up to date records of inventory 1;
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T.Y. B.COM- COST ACCOUNTING-MATERIAL 2016-2017
/) 4o provide the re-uired infor!ation to the !anage!ent for taking inventory decisions< Q2) Mate!ial Reuisition 3ote Ans" Meaning: As a rule in order to prevent !isuse and frauds no !aterial should be issued =ro! the stores ithout a proper ritten authority< 4he docu!ent hich authori:es the 9ssue of !aterial is knon as the !aterial re-uisition note (or stores re-uisition note !aterial authori:ation etc<) Nor!ally the production !anager or the !anger of the concerned cost centre is authori:ed to place a re-uisition for the issue of !aterials ith the stores< 4he stores should !aintain a list of authori:ed persons along ith their speci!en signatures< +aterial re-uisition note !ust be signed by an authori:ed person and contain a detailed list of ite!s re-uired fir a specific cost centre ? cost unit (a) ob batch or process< Q') 4ow Much Quantit/ Can %e Reuisitione( #-ill of ,ate!ials) Ans" Meaning: hen the co!pany receives on order for a ob or a contract etc< the planning ;epart!ent prepare a detailed on order list of !aterials (alongith -uantity of each ite!) "ikely to be re-uired for the entire ob or contract< 4he list of the !aterials is knon as the Bill of !aterials< While in case of ob or contract the bill of !aterials is !ade out in 5espect of each ob or contract in case of a process it is !ade out in respect of a period (year !uch etc) Q) 5iffe!ence %etween %ills of ,ate!ial an( ,ate!ial !euisition note
1 2
'
*
-ills of Mate!ial 9t is docu!ent prepared by the draing office< 9t is a co!plete schedule of co!ponent parts and ra !aterials re-uired for a particular ob or ork order< 9t often serves the purpose of a !aterials re-uired for a particular ob i
Mate!ial Reuisition 3ote 9t is prepared by the fore!en of the consu!ing depart!ent 9t is a docu!ents authoriisng storekeeper to issue !aterials to the consu!ing depart!ent<
9t cannot replace a bill of !aterials<
9t is useful in arriving at historical cost only 9t shos the !aterial actually dran fro! stores<
Q*) Stoc6 leels Ans" Mini,u, leel 1) Meaning: +ini!u! level indicates the loest figure of inventory balance hich !ust be !aintained in hand at all ti!e so that there is no stoppage of production due to nonavailability of inventory< 2) .acto!s: 4he !ain factors considered or the fiation of !ini!u! level of inventory are as follos7 #a) +ai!u! consu!ption and !ai!u! delivery period in respect of each ite! to 15
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T.Y. B.COM- COST ACCOUNTING-MATERIAL 2016-2017
;eter!ine its reorder level< #%) Average rate of consu!ption for each inventory ite!< #c) Average reodder for each ite!< 4his period can be calculated by averaging the !ai!u! and !ini!u! period< ') .o!,ula: 4he for!ula used for its calculation is as follos7 +ini!u! level of inventoryF 5eorder level (Average consu!ption G Average reorder period) Ma7i,u, Leel 1) Meaning: !ai!u! level indicates the !ai!u! figure of inventory -uantity held in stock at any ti!e< 2) .acto!s: 4he i!portant factors hich should be considered hile fiing the !ai!u! level for various inventory ite!s are as follos7 (a) 4he reorder level hich itself is the product of !ai!u! consu!ption of inventory ite! and 9ts !ai!u! delivery period< (b) +ini!u! consu!ption and !ini!u! delivery period for each inventory ite! should also be knon< (c) 4he econo!ic order -uantity (i
T.Y. B.COM- COST ACCOUNTING-MATERIAL 2016-2017
COST
%) 4he -uantity of !aterial ordered is received i!!ediately i
√ ¿
❑
¿
here?
¿
AH Annual usage units 'H &rdering cost per order CH Annual carrying cost of one unit i
Q8) A-C Classification Ans" Meaning: ABC Classification or Analysis is a syste! of inventory control< 9t helps to control different ite!s of stores classified on the basis of the invest!ent involved usually the ite! are divided into three categories according to their i!portance na!ely their value and fre-uency of replenish!ent during a period< 1) DAE category of ite!s consists of only a s!all percentage i
A(antages: 4he advantages of ABC analysis are as shon belo7 1) 9t ensures N interrupted production as ell as !ini!u! invest!ent in inventories of stocks of !aterials< 17
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2) 4he cost of purchase receipt and storage is !ini!i:ed< #) +anage!ent ite!s is saved sine attention need b paid only to the !ost valuable ite! rather than all the ite!s< 4his is knon as the principle of !anage!ent by eception< %) +uch of the routine purchase ork can be handled by clerical staff< Q9) 5istinction
1 2
#
%
* , /
e!io(ic Inento!/ S/ste, 4his syste! is based on physical verification< 4his syste! provides infor!ation about stocks and cost of goods sold at a particular date< 4his syste! deter!ines first inventory and co!putes cost of goods sold as balancing figure< Cost of goods sold includes loss of goods as goods not in stock are assu!ed to be sold nder this !ethod inventory control is not possible 4his syste! is si!ple and less epensive 9t re-uires closure of business for counting of stock
e!petual Inento!/ S/ste, 9t is based on book records<
9f provides continuous infor!ation about stock and cost of sales< 9t deter!ines first cost of goods sold and co!puter stock as balancing figure< Closing inventory includes loss of goods as all unsold goods are assu!ed to be in inventory< 9nventory control is possible under this syste!< 9t is co!ple and costlier !ethod< 9nventory can be deter!ined ithout stopping the operations of the business<
Q;) Inento!/ Tu!noe! Ratio Ans" Meaning: 9nventory 4urnover 5atio is one of the techni-ues of inventory control< 9t epresses the relationship beteen the cost of !aterial consu!ed and the average stock held< O%0ectie: 4he &bective co!puting the 9nventory 4urnover 5atio is to deter!ine the efficiency With hich inventories are !aintained< 4he &bective is to find out (a) =ast +oving $tock i
Where7 (i) Cost of !aterials consu!ed H opening stock I purchases closing stock (ii) Average stockH1?2 (opening stock Iclosing stock) 1:
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T.Y. B.COM- COST ACCOUNTING-MATERIAL 2016-2017
Note7 4his ratio is usually epressed as DE nu!ber of ti!e< Average no< of days for hich an average inventory is held
¿
365 days
inventory Turnover
Inte!p!etation: 9t indicates the speed ith hich the inventory is consu!ed< 9n general a high ratio 9ndicates fast !oving stock and a lo ratio indicates slo !oving stock< oever too high ratio and too lo ratio call for further investigation< A too high ratio !ay be the result of a very lo 9nventory levels hich !ay result in fre-uent stock outs< &n the other hand a too lo ratio !ay be the result of ecessive inventory levels slo!oving or dor!ant or obsolete inventory and thus the fir! !ay incur high carrying costs< 4hus a fir! should have neither a very high nor a very lo $tock turnover ratioJ it should have a satisfactory level< 4o udge hether the ratio is satisfactory or Not it should be co!pared ith its on past ratios or ith the ratio of si!ilar fir!s in sa!e industry or ith industry average<
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