CHAPTER
1
Understanding the Understanding the role of Accounting in Business
ACCA F2 Management Accounting
PRACTICE KIT By: Hasaan Fazal
COPYRIGHT ©2011 – ACCA LIVE | Most affordable online classes for CAT and ACCA
CHAPTER
1
Understanding the role of Accounting in Business
FIA FMA
PRACTICE KIT
Management Accounting
By: Hasaan Fazal
COPYRIGHT ©2011 – ACCA LIVE | Most affordable online classes for classes for CAT and ACCA
Mock ACCA FIA –F2 FMA | Practice Kit Exam Management Accounting TABLE OF CONTENTS
100+
Questions
Chapter 1
Cost Classification
05
Chapter 2
Cost Behaviour
15
Chapter 3
Material costing
26
Ch 1
Cost Classification
Hasaan Fazal, a student of Chartered Accountancy (ICAP) himself, is enjoying teaching accountancy, auditing and economics subjects to different professional qualifications like CAT, ACCA etc. He is thankful to ALLAH that because of His mercy he founded ACCA LIVE which is Pakistan’s first website conducting online classes for CAT and ACCA students globally. Besides teaching on ACCA LIVE, he also runs his blog as a hobby where many of his e-books, notes, practice questions, mock exams, exam tips and video lectures are available for free. He also invites feedback from students, visitors and teachers to help make this publication and others even better.
Although this publication has been written keeping the students studying paper 2 of ACCA course, however, the students of other professional qualifications like CA, CIMA and ACCA etc. who want to test their Management Accounting and Costing basics can also consult this Practice Questions Kit.
This book is divided in different chapters according to ACCA F2 syllabus so that students can practice the questions pertaining pertaining to specific topic easily. Every Every question on this book is internally linked for easy access of student. For example, example, if students wants to know the answer answer then with just a click the book will scroll automatically to open the page where answer for such question is. We have have separated the answers and their explanations, usually which are kept together. This has done again for students’ students’ convenience as sometime they just want to k now the correct answer and want to think about the concept behind behind it on their own. Therefore, if student presses the answer button the only correct choice or answer will be presented presented and if student presses explanation then both answer and the explanation will be given. Buttons Buttons used in the documents and their corresponding meanings meanings are as follows:
th e document will scroll to the answer of corresponding q uestion ..A.. When this button is clicked the
…E.. Clicking this button will open the answer and the explanation of the underlying concept
..Q .. This button will bring the student back to the corresponding question
As this this Practice Questions Kit is provided free of cost so that students can benefit from it without getting worried about their finances. finances. Therefore, we need your help to help other students so that they can also learn, practice and become successful in their lives. So, let others know about this and having more students reading this book will keep us motivated as well.
So, it’s that simple. More you share by sharing it with your friends and
everyone you know. Help others to get a help for yourself! © PakAccountants.com 2011
Ch 1
Cost Classification
CHAPTER CH APTER
1
Cost Classification
Ch 1
Cost Classification
1-1 A supervisor is responsible for monitoring the production process. One of his responsibilities responsibilities includes that he has to inspect each unit before it is labeled as “Good” and sent to finished goods sto re. Supervisor monitors and inspects FOUR different goods produced on the product line without any specific time allocation to each product produced. A. Direct cost B. Indirect cost C. Administrative cost D. Selling cost
1-2 Depreciation expense expense of vans used to deliver units sold at the customer’s place will be treated as: A. Distribution expenses B. Selling expenses C. Marketing expenses D. All of the above
1-3 Following data is available for the current period pertaining to staff working in Hoavy Co. Sales commission paid to sales rep Legal expenses
5,000 1000
carriage outwards maintenance and repairs
750 1050
supervision
325
40% of supervision cost relates to administrative activities where the rest is incurred in supervising sales force. 30% of Maintenance and repairs is paid towards sales staff conveyance. Calculate from the above data:
Administrative cost
Selling cost
Ch 1
Cost Classification
1-4 The company uses public transport for its employees. Due to the strike of transporters, company has to incur $500 on arranging transport facility. The cost incurred by the company will be classified as: A. Normal cost B. Abnormal cost C. May be normal may be abnormal D. None of the above
1-5 A business manufactures several items of furniture. It has a number of branches and a number of departments at each branch. Which of the following could be a cost unit? A. A table B. Assembly department C. The UK branch D. None of the above
1-6 Classification of costs whether it is avoidable or not, is necessary because: A. Both avoidable and unavoidable are considered in decision B. Only unavoidable costs are considered in decision making C. Only avoidable costs are considered in decision making D. None of the above
1-7 Which of the following is a cost object? A. A product B. A finishing department C. Northern sales region of the company D. All of the above
Ch 1
Cost Classification
1-8 Which is NOT an example of a functional analysis of cost? A. Overheads B. Marketing costs C. Selling costs D. Manufacturing costs
1-9 Operational layer of management usually contains: I. II. III.
Cost center Revenue center Profit center
IV.
Investment center
A. I only B. II and III only C. IV only D. I and II only
1-10 Prime cost is the sum of: I. Direct material cost II. Direct labour cost III.
Overheads cost
IV.
Direct costs (other than direct material and direct labour)
A. I and II only B. II and III only C. I, II and III only D. I, II and IV only
Ch 1
Cost Classification
1-11 If we relate the ‘three management layers’ with ‘responsibility centers’ then which of the following figures best represent the relationship? Where: C = Cost center R = Revenue center P = Pofit center I = Investment center
1
3 A. 1 B. 2 C. 3 D. 4
P
I
I
P
R
R
C
2
R
C
C
R
I
C P
4
I
P
Ch 1
Cost Classification
1-12 If stock is evaluated on prime cost basis then which of the following is considered as period cost? I. II.
Production overheads Administrative overheads
III. IV.
Selling overheads Distribution Distribution overheads
V.
Finance costs
A. I only B. II, III and IV only C. II, III, IV and V only D. All five
1-13 Which of the following fall under the definition of “Cost object”?
A. A cost center B. Any business activity for which cost determination is desired C. A product or service D. All of the above
1-14 Costs that can be identified with a particular cost object are called: A. Production costs B. Inventoriable Inventoriable costs C. Direct cost D. Relevant cost
Ch 1
Cost Classification
2-1 Classify the following as Fixed, Variable or Semi-variable
1. Machine depreciation (straight line basis) 2. Furniture depreciation (Reducing balance
7. Raw material for conversion to finished goods
method) 3. Equipment depreciation depreciation (Hours used
8. Insurance premium 9. Stores and supplies 10. Supervisor’s salary
method) 4. Motor vehicle depreciation (Kilometers driven)
11. Motor vehicle repairs 12. Office rent
5. Machine depreciation (Machine hours
13. Factory rent
used) 6. Heating, lighting, power
14. Research and development cost 15. Telephone charges
2-2 Classify each of the following on Functional basis
1. Interest on loans
10. Salary of store manager
2. Depreciation on distribution vehicles 3. Factory rent 4. Audit fee
11. Lubrication costs 12. Lawyer’s fee 13. Office PC repairs
5. Bad debts
14. Compensation to Researchers paid on
6. Research and development expenditures 7. Daily wages of typist
hourly basis 15. Bank charges
8. Salary of inspection supervisor
16. Penalty for overdue tax
9. Insurance premium on finished goods
Ch 1
Cost Classification
2-3 Mention the correct category to which a cost belongs under each class given on the left DM DL DE OH NM
1. Lubrications for plant and machinery 2. Storage discs for office personal computers 3. Premium for office machinery repairs under 1 year contract 4. Factory telephone charges 5. Interest on loan taken from Bank 6. Fee for market research conducted by a third party 7. Bank charges 8. Salary of security supervisor of production premises 9. Carriage inwards paid for raw materials bought 10. Royalty towards the licensed use of formula 11. Announcement and promotional letters sent to VIP customers 12. Audit fee 13. Advertising cost incurred for promotion in print media 14. Daily wages of storekeepers storekeepers 15. Postal charges for sending invoice to customer 16. Expenses incurred on a recreational event organized for factory workers in the open area of production hall 17. Daily wages of fork lift operators responsible to handle raw material 18. Cost incurred on making a feasibility report for the upcoming product 19. Advertisement of the product 2 months prior to launch 20. Developing a new process design 21. Daily wages of factory crane operator 22. Legal expenses 23. Depreciation Depreciation of office equipments 24. Insurance premium paid for factory workers 25. Subscription Subscription fee paid for ISO certification of production facility 26. Hourly wages of machinist in cutting and filing department 27. Sales commission of sales workforce
DC IC
PrC PeC
MC AC SC FC
Ch 1
Cost Classification
3-1 Make the appropriate selection selection from the choices within brackets 1. [Carriage inwards / C arriage outwards] is an example of direct material cost 2. Sum of all the direct costs is called [Prime cost / Full cost] 3. Income statement in general purpose financial statements usually classifies cost on [Functional basis / Relevance basis / Behavioral basis]
4. Conversion costs are applied on [Direct material / Indirect material] to produce finished goods 5. A rise in the salary of a factory floor supervisor will increase [Period cost / Product cost] 6. If the cost of oil and spares is mistakenly treated as a direct material cost then it will cause [overstatement / understatement / no change] in product cost’s total.
3-2 You are going through the accounting records made by your assistant for the month ended. You have pointed out several mistakes which are listed below. How each of the situations listed below will affect the items listed on the right. Use ( ↑) for “overstatement”, (↓) for “understatement” and (×) to mean “no effect”
Mistakes found
Effects
1. Factory supervisor’s salary has been treated as direct labour cost
Product cost Period cost
2. Office rent has been included in the factory rent
Prime cost Conversion cost
3. Salaries of sales staff has been accounted for as production overheads
Manufacturing cost Administration cost
4. Carriage inwards paid for material bought treated as carriage outwards
Direct material cost Indirect material cost
5. Total of direct material cost has been overcastted
Conversion cost Factory cost
6. Bad debts has been included in the financial expenses
Production cost Operating cost
Ch 1
Cost Classification
3-3 Select the appropriate options from the brackets that correspond with the effects on the right. ( ↑) means overstatement due to the mistake, ( ↓) means understatement due to the mistake (×) means no effect.
Description
Effects
[Research cost / Royalty] has been wrongly treated as part of production
Inventoriable Inventoriable costs ↑
overheads
Non-inventoriable Non-inventoriable costs ↓
Salaries of [Factory staff / Sales staff] has been wrongly included in
Direct production cost ↓
administrative administrative overheads
Indirect production cost ×
[Patent fee / Audit fee] has wrongly been treated as indirect production
Product cost ×
costs
Period cost ×
[Factory rent / Office rent / Loan interest] has been mistreated as selling
Operating cost ×
overheads
Financial cost ×
Salary of [Direct worker/ Factory supervisor] is overcastted
Prime cost ↑ Conversion cost ↑
4-1 Theoretical exercises 1. Why non-manufacturing costs are treated as period cost and NOT as product cost? 2. What are capital and revenue expenditures? How entity determines whether expenditure expenditure is of capital nature or revenue? 3. What is responsibility accounting and what is i ts significance in managing business? Also discuss different responsibility centers and how each of they are interrelated. 4. Why understanding the concept of cost is important and what is the difference between cost, expense and loss? 5. What is the t he difference between management, management accounting and management system?
Ch 2
Cost Behaviour
CHAPTER CH APTER
2
Cost Behaviour
Ch 2
Cost Behaviour
1-1 In business, manager has to perform many different roles. One of the key roles is “planning”
Planning deals with which part of time? A. Future B. Past C. Present D. All of the above
1-2
Cost ($)
The graph above is an example of: A. Cost decreasing at increasing rate B. Cost increasing at increasing rate C. Cost increasing at decreasing rate D. Cost decreasing at decreasing rate
Ch 2
Cost Behaviour
1-3 pH Ltd is the manufacturer of many important chemicals. It requires spirit as its raw material. pH supplier agreed to offer bulk order discounts if the company starts purchasing in quantities more than 5,000 units every purchase order. At the moment company is purchasing 2,000 units in every order placed. Which of the following figure correctly presents the change in TOTAL VARIABLE COST as a result of discount offer?
Cost
Cost
1
2
Activity Level
Activity Level
Cost
Cost
3 Activity Level
A. 1 B. 2 C. 3 D. 4
4 Activity Level
Ch 2
Cost Behaviour
1-4 Happy Jumps Plc is a producer of toys for toddlers and children aged 5 years. Company uses “o-plastic” as its
basic raw material. To appreciate a long relationship with the company, supplier of “o -plastic” is willing to offer 30% concession if company starts buying in large quantities. Using the information given, pick the correct figure that correctly represents the change in PER UNIT VARIABLE COST as a result of discount offer
Cost
Cost
1
2
Units
Units
Cost
Cost
3 Units
A. 1 B. 2 C. 3 D. 4
4 Units
Ch 2
Cost Behaviour
1-5 Power Depp Ltd runs a fully automated manufacturing facility and is hugely dependant on electricity. Recently local government has announced the increase in the line rent and the unit charges. Line rent is charged at a constant rate whereas units are charged on the basis of kWH (kilowatt hours) consumed. How total electricity cost will be represented if both the line rent and per unit charges increase?
Cost
Cost
1
2
Activity Level
Activity Level
Cost
Cost
3 Activity Level
A. 1 B. 2 C. 3 D. 4
4 Activity Level
Ch 2
Cost Behaviour
1-6 A new industrial zone is ready for industrial operations and in order to populate this zone government is offering many incentives. One of these incentives is that companies will be charged at higher rates until 200 units of natural gas is consumed. Above 200 units until 500 units gas will be provided free of cost and if the consumption exceeds exceeds 500 units of gas then it will be charged at concessional rates. If the cost and the gas units consumed is plotted on the graph then which figure best represents this situation?
Cost
Cost
1
2
Activity Level
Activity Level
Cost Cost
Cost
3 Activity Level
A. 1 B. 2 C. 3 D. 4
4 Activity Level
Ch 2
Cost Behaviour
1-7 A telephone company is offering a “4k free minutes” package to its golden customers. The offer states that
against fixed monthly charge of Rs. 1,500, customers get 4,000 free minutes. Any calls made within these 4,000 minutes are named as “free calls”.
Beyond 4,000 minutes customer is charged on per call basis and is termed as “paid calls” If the graph is plotted only for “paid calls” then which of the following is a true representation?
1 4,000
2 4,000
3 4,000
A. 1 B. 2 C. 3 D. 4
4 4,000
Ch 2
Cost Behaviour
2-1 The following information is available to you. Units
Total cost
4,600
81,981
4,800
80,784
5,000
85,010
5,200 5,400
86,417 88,582
5,600
90,561
Using the high low method, calculate:
Per unit variable cost
Fixed cost
Total cost for 6,100 units
2-2 You are working as a plant manager at Metal & Metal Plc and deciding on next month’s production plan. To estimate the total production cost for the month of July you are using last six month’s total production cost
and direct labour hours data which is as follows: Month January February
Direct Labour hours 14,250 11,250
Production cost 54,564 49,875
March April
12,000 12,600
50,880 59,450
May
11,850
50,916
June
12,072
52,479
In the month of March 1,000 labour hours were worked to make good the inventory of one client which was not up to the specification. It is company’s policy to take only 20% of labour hours spent on “re-work” as normal labour hours. However, production production cost needs no adjustments. Production cost for the month of June includes the direct material cost which was incurred to compensate for the wastages. Later it was revealed that material was wasted due to supervisor’s carelessness and material worth 6,200 was lost abnormally. If you are planning to work at 95% of total workable labour hours for the month of July then what is the total estimated production cost for the month of July? Total workable labour hours are expected to be 80% of total available labour hours which is 26,000.
Ch 2
Cost Behaviour
2-3 You are asked by your boss to compute the maintenance cost if machine operates for 25,200 hours using the following information: Machine hours
Machine running cost
18,000
67,800
22,000
71,600
It is told to you by machine operator that when machine runs for more than 20,000 hours the inspection checks needs to be increased. For this inspector has to be paid additional 4,000. Also, when machine is operated for more than 25,000 hours then insurance premium steps up by 2,000. Inspector’s salary and
insurance premium are fixed in nature. Use high-low method to find out the machine running cost at the required activity level
2-4 Shortcut using per unit variable cost A cost center has the following cost related information at different activity levels: Output (units) 5,000
Total cost 112,500
6,000
135,000
9,000
174,000
Manager of the cost center while briefing you highlighted highlighted the point that there is a step up in fixed cost by 20% when the output exceeds 5,500 units. Variable cost per unit remains constant at any activity level. What is the fixed cost at 5,000 units’ level. Also calculate the total cost at 4,000 units level.
Ch 2
Cost Behaviour
2-5 The following information is available to you for a certain company: Direct labour hours 10,000
Total cost 224,600
15,000
260,000
23,000
310,000
Variable cost per unit stays constant from 3,000 to 13,000 and then 13,001-23,000 activity level. What is the total cost if direct labour work for 11,500 hours:
If the fixed cost steps up by 9.375% if labour hours exceed 13,000 hours
If the fixed cost steps down by 5% if labour hours exceed 13,000 hours
2-6 You are going through the cost information of one of the production facility of the company which is as follows: Machine hours
Total cost
32,000
515,000
35,000
530,600
41,000
570,000
Variable cost per unit remains unchanged from activity level of 30,000 -40,000 and then from 40,001 to 45,000. What is the total cost if machine runs for fo r 42,500 hours provided:
the fixed cost steps up by 10% if machine hours exceed 36,000 hours
the fixed cost steps down by 10% if machine hours exceed 36,000 hours
Ch 2
Cost Behaviour
3-1 Make the appropriate selection from the choices c hoices within brackets
1. With the increase in activity level total [fixed cost / variable cost] remains constant whereas per unit [fixed cost / variable cost] also remains constant. 2. An increase in total fixed cost with no change in activity level will cause [increase / decrease] in per unit fixed cost. 3. If total cost and variable cost is plotted on the graph, total cost stays [parallel / perpendicular] to the variable cost under normal situations. 4. Per unit fixed cost and per unit variable costs have [direct / inverse / no universal] relationship with each other.
Ch 3
Material Costing
CHAPTER CH APTER
3
Material Costing
Ch 3
Material Costing
1-1 The inventory is treated as finished goods when: A. Goods are in saleable condition B. All the activities to complete the production are finished C. There is no stock left for more sales D. Inventory has been consumed completely in the production process
1-2 In inflationary economy (in the time of rising prices), if the company is following First in First out (FIFO) method to value its stock then the cost of material in cost of sales will be ___________ current prices. A. Lower than B. Higher than C. Same as actual D. Insufficient information to judge
1-3 In deflationary economy (in the period of falling prices), if the company is following First in First out (FIFO) method to value its stock then the gross profit of the company will tend to be ___________ A. Higher B. Lower C. Stable D. Can’t say
1-4 In deflationary economy (in the period of falling prices), if the company is following First in First out (FIFO) method to value its stock then the current assets of the company will __________ A. Increase B. Decrease C. Remain unchanged D. Can’t say
Ch 3
Material Costing
1-5 In inflationary economy (in the time of rising prices), if the company is following First in First out (FIFO) method to value its stock then the value of closing stock will be ____________ current prices. A. Lower than B. Higher than C. Same as D. Insufficient information to judge
1-6 If the annual holding cost per unit falls then what will be the effect on the economic order quantity (EOQ)? A. EOQ will fall B. EOQ will increase C. EOQ will remain unaffected D. None of the above
1-7 If the annual holding cost per unit falls then what will be its effect on ordering cost per order? A. Per order cost will increase B. Per order cost will decrease C. Per order cost will have no affect D. None of the above
1-8 If the annual holding cost per unit falls then what will be its affect on total ordering cost? A. Total ordering cost will increase B. Total ordering cost will fall C. Total ordering cost will remain unaffected D. None of the above
Ch 3
Material Costing
1-9 If the ordering cost per order increases then what will be its affect on the economic order quantity (EOQ)? A. EOQ will fall B. EOQ will increase C. EOQ will remain unaffected D. None of the above
1-10 If the ordering cost per order increases then what will be its affect on annual per unit holding cost? A. Holding cost per unit will increase B. Holding cost per unit will decrease C. Holding cost per unit will remain unaffected D. None of the above
1-11 If the ordering cost per order increases then what will be its affect on total annual holding cost? A. Total holding cost will increase B. Total holding cost will decrease C. Total holding cost will remain unaffected D. None of the above
1-12 Production Hall of Hawl Trucks ltd assembles mining machinery. machinery. On a certain day super visor felt a need of another 500 units of ball bearings. What do you think is a proper way of getting these 500 units from the store? A. Approach purchase department after raising purchasing requisition on his own B. Approach store manager and ask him to issue material requisition C. Approach production manager manager and ask him to issue material requisition D. Go to store and pick the required number of stock
Ch 3
Material Costing
1-13 Production manager of “Clean n Clear P lc” found some material scattered all over the production hall. He
asked the junior worker to collect all the unnecessary raw material and submit them with the store manager.
Which document will be raised by the production manager? A. Debit note B. Material sent note C. Material return note D. Good dispatch note
Where the store manager will record the receipt? A. Store ledger card B. Goods received note C. Material holding note D. None of the above
1-14 Happy teeth are renowned for producing hairline teeth braces. The store department found some units in the store which are not up to quality standards and were received last week. Supplier accepted the return. Which document do you think will be raised by:
The store department?
The purchase department?
The accounting department?
1-15 Bubble Gum Co. is purchasing gelatin from a particular supplier for last 10 years. But today purchase manager received a fax that supplier will not be able to entertain the orders any more as they are changing their line of business. Now purchase manager is finding a new supplier that will give the most competent price quote. What do you think Purchase manager should do to find out the new supplier? A. Issue short tender notice B. Raise quotation C. Issue prospective of the company D. Advertise purchase order
Ch 3
Material Costing
1-16 Which of the following is NOT an example of holding cost? A. Interest charges B. Stock obsolescence C. Storage space D. extra cost of urgent buying
1-17 Ordering cost forms part of: A. FOH B. Direct material C. Revenue expense D. Deferred costs
1-18 Carriage inwards is a: A. Direct cost of material B. Indirect cost of material C. Hidden cost of material D. Admin cost of material
1-19 Purchase order is sent to: A. Supplier B. Store keeper C. Accounts department D. Cost control department
Ch 3
Material Costing
1-20 Every time if stock falls to 1200 units, the stock control department’s automated system sends a requisition
to supplier for 2000 units. Tick the statement(s) that is/are correct. 1200 is the reorder level 2000 is the reorder level 1200 is the reorder quantity 2000 is the reorder quantity
1-21 The purpose of calculating an EOQ is: A. To minimize the stockholding quantity B. to minimize the stockholding cost C. to minimize the total cost of purchasing and storing the material D. to enable the reorder level of the material to be established
1-22 You are working as a chief accountant in Cereal Mills Ltd. You have received an invoice from one of the suppliers of the company. Tick the document(s) that you require before you authorize payment to the supplier? Material requisition Purchase requisition Purchase order Sales order Delivery note Goods received note Cash receipt
Ch 3
Material Costing
1-23 Which of the following gives the correct order of documents? I. II.
Purchase order > Acknowledgement > Goods received note Tender > Quotation > Purchase order
III.
Invoice > Debit/Credit note > Cash receipt
IV.
Material requisition > Purchase requisition > Purchase order
A. I and II only B. I and III only C. II, III and IV only D. All four
1-24 Which of the following statement is true regarding Economic Order Quantity? In order to calculate EOQ, it is assumed that; I.
Holding cost per unit remains constant
II. III.
Holding cost per unit can change Ordering cost per order remains constant
IV.
Ordering cost per order can change
A. I only B. III only C. I and III only D. II and IV only
Ch 3
Material Costing
1-24 Which of the following graph correctly identifies the Economic Order Quantity (EOQ)?
Total cost Total cost
Holding cost
Order cost
Order cost
Holding cost
1
2 EOQ
EOQ
Total cost Order cost Holding cost
Order cost Total cost Holding cost
3 EOQ
A. 1 B. 2 C. 3 D. 4
4 EOQ
Ch 3
Material Costing
2-1 Date
Purchases
Issues
1 Jul 5 Jul
150@30 250@25
100 160
7 Jul
130@45
260
What will be the value of closing stock using FIFO, LIFO and AVCO method?
2-2 ACCA LIVE manufactures PC case. To complete one pc case they need certain amount of alloy and plastic. Following information details the purchases and issues made during the year to production hall by ACCA LIVE store:
Purchases: Date
Quantity
Rate
Jan 1
100
60
Jan 5
250
75
Jan 10 Jan 15 Jan 20
120 180 250
63 72 66
Jan 26
160
55
Jan 30
300
61
Issues: Date
Quantity
Jan 2
80
Jan 7 Jan12
200 150
Jan 17
200
Jan 23
260
Jan 29
100
Jan 31
300
Calculate the value of closing stock using short cut method under:
FIFO
LIFO
AVCO
Ch 3
Material Costing
2-3 The accountant prepared the following store ledger card for the month ended 31 June 2010. Being a supervisor you find out that store ledger card is full of mistakes.
DATE June 1 June 2
Purchases Q
200
R
15
Issues T
180
350
T
200
20
100
15
250
23
25
June 5
June 6
R
3000
June 3 June 4
Q
Balance
23
Q
R
T
350 200 350 200 150 200 150 180 100 150 180 100 150 180 100
20 15 20 15 20 15 20 25 15 20 25 15 20 25 23
7000 3000 7000 3000 3000 3000 3000 4500 1500 3000 4500 1500 3000 4500 2300
The accountant was supposed to make the store ledger card on FIFO basis. What is the correct value of closing stock?
2-4 DATE June 1 June 2 June 3
Purchases Q
300
R
Issues T
Q
R
Balance T
3000 200
Fill in the missing boxes under the following inventory valuation methods:
FIFO
Q
R
650
20
T
Ch 3
Material Costing
2-5 Following is the store ledger card of Items and Items Ltd.
DATE Jan 1 Jan 4 Jan 6
Purchases Q
300
R
Issues T
Q
R
Balance T
Q
R
650
20
T
3000 200
During the month:
one material return note was raised for 30 units of stock.
one debit note was raised for 56 units of stock purchased during this month.
Enter the above two returns in the store ledger card and complete the rest of the recording necessary. Company is using AVCO method to value its inventory.
2-6 Deedat Ltd requires 30,000 units of material “X” every year to be used in finished goods. Purchase price per per
unit is 12 on which supplier. Supplier has agreed to bear half the cost of ordering where per order cost is 400. Cost of holding each unit in stock is 3 plus 10% of purchase price. Determine the economic order quantity that Deedat Ltd should be ordering every time
2-7 Solar Inc are manufacturing solar cells. Each solar cell requires 3 kg of silicon. The accountant has forecasted that expect demand of silicon cells for next year will be 150,000. Solar Inc buy silicon from Japan and each order takes 2 months to reach. Cost of placing each order is 12,000 and cost of holding 1 kg of silicon in store is 10. Advice the quantity to Solar Inc they should be ordering every time which helps them minimize material related costs.
Ch 3
Material Costing
2-8 Energy bank produces batteries to be used in different household items ranging from cell phones to uninterrupted power supplies (UPS). Each battery requires 2 grams of induction material. Marketing manager of the company is of the view that this year’s sales will be 150% m ore than last year’s sales. Last year Energy bank sold 10,500 batteries. batteries. Energy bank produces only up to expected amount of sales. Each order cost 150 and purchase price of buying 100 grams of induction material is 2. Cost of holding 50 grams of induction material in store is 2. What is the most appropriate appropriate order size for buying induction material that will minimize the total annual cost?
2-9 Javed Miandad Ltd is renowned for making quality bats. They purchase 50,000 liters of glue every year which is used in making bats. At the moment company is acquiring 1200 liters of glue every order where purchase price of buying each liters of glue is 20. Cost of ordering each batch is 55 and holding one liters of glue in store is 25 cents per annum. Advice Purchase manager about economic order quantity. Also calculate the savings made by the company in total annual cost using EOQ basis.
2-10 Airfun Plc produces BB guns for different age of players. For this they require 65,000 65,000 liters of organic o rganic solvent annually. Cost of 135 is incurred to place each order. Cost of 0.4 is incurred for maintaining the stock of solvent in good condition. Currently, purchase department acquires 5,000 liters per order. Each liter of organic solved cost 2.50. Compute optimum order quantity using EOQ methodology and also calculate the total annual cost saved by buying on EOQ basis.
2-11 An annual report of a Police station suggests that 52,000 handcuffs will be needed next year. Each handcuff costs 300. Further 20 are incurred to engrave the name of police precinct and serial number. To place and process an order 140 are incurred and 70 are incurred on securely transporting handcuffs from the licensed manufacturer. It is estimated that its costs about 22% of purchase cost to carry the inventory. If EOQ formula is used then what is the economic order quantity and the number of orders? Also give after how many days a fresh order will be placed with the supplier?
Ch 3
Material Costing
2-12 Soundstorm manufactures manufactures professional level audible and entertainment devices. One of the key raw material is copper which is required 10,000 tonnes annually. Purchase cost per ton is Rs. 125,000. Ordering cost is Rs. 5,600. Holding cost per ton of copper is 0.3% of purchase cost. Management is considering buying on EOQ basis. In the mean time, supplier announced bulk purchase offers for different order sizes which are as follows: Units
Unit price (000)
0 to 499
125
500 to 2,999
115
3,000 to 5,999
110
6,000 and above
105
Required:
Calculate economic order quantity using EOQ formula and measure total material cost.
Advice management what order size they should establish to achieve minimum possible total material cost.
2-13 Annual requirement Invoice value
56247 2.45/unit
Freight Ordering cost
0.6 /unit 65/order
Carrying cost
12c per one dollar of average stock
Calculate economic order quantity
What is the total handling cost for the year if the order o rder quantity is 3650 and buffer stock is 1230?
If cost of ordering increases by 15% in the next year, what will be EOQ for the next year?
After how many days should the next order be placed?
2-14 Find the missing figure in the following:
× 90,0?00 × 220220 6,600 = √ 2 ×90,
Ch 3
Material Costing
2-15 Which of the following information is found on the face of material requisition note? Serial number: Required date: Issue date: Time: Invoice number: Order number: Store requisition requisitio n number: GRN number Quantity required: Department name or number: Supplier's name: Supplier's address: Tax: Discount: Total Signature: Production manager / Purchase manager / Store manager
2-16 Which of the following information can be found on purchase order? Serial number: Required date: Issue date: Time: Invoice number: Order number:
requisitio n number: Store requisition GRN number Quantity required: Department name or number: Supplier's name: Supplier's address: Tax: Discount: Total Signature: Production manager / Purchase manager / Store manager
Ch 3
Material Costing
2-17 Which of the following items are found on purchase requisition ? Serial number: Required date: Issue date: Time: Department name or number: Supplier's name: Supplier's address: Invoice number: Order number:
requisitio n number: Store requisition GRN number Quantity required: Tax: Discount: Total Signature: Production manager / Purchase manager / Store manager
3-1 Make the appropriate selection from the choices c hoices within brackets
1. [Holding cost / Ordering cost] increases with the increase in orders 2. [Purchase order / Material requisition / Purchase requisition] is sent by the store manager to the purchase department when the stock reaches reorder level. 3. EOQ model is used to minimize [total cost / total annual cost] of material 4. Material requisition requisition note is issued under the authority and signature of [purchase manager / production manager] 5. Material return note is authorized by [Foreman / Store superintendant / Purchase manager]
Ch 3
Material Costing
4-1 Theoretical exercises 1. According to EOQ model, optimum reorder quantity is established at the point where holding costs and ordering costs are equal. Discuss holding and ordering costs affect the optimum reorder size. Also give five examples of holding and ordering cost each. 2. What are the main advantages and disadvantages of FIFO, LIFO and AVCO inventory valuation methods? 3. What are the weaknesses of periodic inventory management system as compared to perpetual inventory management system?
