Subject : Cost Accounting 1

Chapter 1 : Inventory Management

Model Answer to Chapter 1 : Inventory Management

Example 1
A

Example 2
(a) B 36,000 units (2,250 x 16)
(b) 16,500 units [36,000 – (1625 x 12)
(c) C 42,500 units [36,000+14,500-(1,000 x 8)

Example 3
(a) C 10,820 [6,300 + 6,500-(180 x 11)
(b) D 1,750 [6,300-(350x13)

Example 4
A-2,000 [500+(3,000/2)]

Example 5
£
(a) Purchase cost 384,000 (4,000 x £96)
(b) Ordering cost 2,400 [(4,000/500) x £300]
(c) Holding cost 2,400 [(500/2) x 10% x £96]
Annual cost 388,800

Example 6
C £3,000 [(2,000/2)+500] x £2

Example 7
D 100units √2 x (12 x 2,000) x £45
(2,160 x 10%)

Example 8
D 2,191units √2 x (48 x 250) x £400
(20 x 10%)
Example 9
(a) 160 units √2 x (12 x 150) x £32
(25 X 18%)

(b)
Cost per unit (£) 25 25 25
Annual demand (units) (12 X 150) 1,800 1,800 1,800
Order size (units) 100 200 600
Number of orders (Demand/Order size) 18 9 3
Average stock (units) (½Reorder Size + Min level) 50 100 300
£ £ £
Purchase costs 45,000 45,000 45,000
Ordering costs (No of order x Ordering Cost) 576 288 96
Holding costs (Average Stock x Holding cost) 225 450 1,350
Total annual costs 45,801 45,738 46,446

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 Subject : Cost Accounting 1
Chapter 1 : Inventory Management

Example 10
C

Example 11
Purchase price per unit (£) (£96-8%) 88.32
Annual demand (units) 4,000
Reorder quantity (units) 1,000
Number of orders (4,000/1,000) 4
Average stock (units) [(½ x 1,000) + 0] 500
£
Puchase costs (4,000 x £88.32) 353,280
Ordering costs (4 x £300) 1,200
Holding costs [500 x £88.32 x 10%] 4,416
Total annual costs 358,896

Example 12
G134 (kg) G122 (kg) G98 (kg)
Aye (400 units) 19,200 20,800 24,000
Bee (1,500 units) 135,000 52,500 18,000
Material requirements 154,200 73,300 42,000

Example 13
(a) Production budget
Exe (units) Wye (units)
Sales 5,500 7,900
Add: Closing stock 400 600
Less: Opening stock (300) (400)
Production 5,600 8,100

(b) Material requirements statement

PP7 (kg) RX3 (kg)
Exe (5,600 units) 16,800 11,200
Wye (8,100 units) 32,400 8,100
Material requirements 49,200 19,300

(c) Production budget

Exe (units) Wye (units)
Net production 5,600 8,100
Reject 1,400 900
Gross production 7,000 9,000

(d) Material requiements statement

PP7 (kg) RX3 (kg)
Exe (7,000 units) 21,000 14,000
Wye (9,000 units) 36,000 9,000
Material requirements 57,000 23,000

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 Subject : Cost Accounting 1
Chapter 1 : Inventory Management

Example 14
Units
Sales 19,700
Increase in closing stocks 820
Net production 20,520
Reject – Operation 3 1,080
21,600
Reject – Operation 2 5,400
27,000
Reject – Operation 1 3,000
Gross production 30,000

Material requirements:

TP5 = 30,000 units x 5kg = 150,000 kg

TR7 = 30,000 units x 8kg = 240,000 kg

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 Subject : Cost Accounting 1
Chapter 1 : Inventory Management

MODEL ANSWER TO QUESTION 1

(a)
Order No of Ordering Average Stock carrying Total
size orders costs stock costs cost
(units) (units)
500 12 2,400 250 600 3,000
1,000 6 1,200 500 1,200 2,400
2,000 3 600 1,000 2,400 3,000
3,000 2 400 1,500 3,600 4,000
6,000 1 200 3,000 7,200 7,400

Optimal order size = 1,000 units

(b)

(c) Stock holding costs

Any 2 of the following:
Insurance, Material handling, Storekeeper’s salary, Interest
Ordering costs
Any 2 of the following:
Postage, Paperwork, Telephone, Internet, Email, Purchasing Officer’s salary

(d) Option s available

Order size 1,000 2,000 6,000
Number of orders 6 3 1
Component price (£) 20 19 18.5
Order costs (£) 1,200 600 200
Stock carrying costs (£) 1,200 2,280 6,660
Component costs (£) 120,000 114,000 111,000
Total annual costs (£) 122,400 116,880 117,860

Advice
Order 2,000 components at discount price of £19 three times a year
This minimises the total annual costs to £116,880.

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 Subject : Cost Accounting 1
Chapter 1 : Inventory Management

MODEL ANSWER TO QUESTION 2

 Free stock does not cover in syllabus

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Subject : Cost Accounting 1
Chapter 1 : Inventory Management

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 Subject : Cost Accounting 1
Chapter 1 : Inventory Management

MODEL ANSWER TO QUESTION 3