What are the implications of Economic Order Quantity in proper inventory management?

21 Sep

Cost & Management Accounting


1. The data shown below relate to an industrial organization that manufactures household appliances.

Standard quantity required of materials item 0009 1 kg.

Standard price per kg. ₹ 10

Product in a month appliances 100 kgs.

Actual quantity of materials used 98 kgs.

Actual price paid ₹ 11/kg

The following calculations for variances have been made:

Material usage variance = 2 kgs. @ ₹ 11 = ₹ 22

Material price variance = 100 kgs. × ₹ 1 = ₹ 100

Do you agree with these calculations? If not, provide a correct calculation for the variances.

2. ABC Ltd. started a factory in Kolkata on 1st April, 2021. Following details are furnished about its activity during the year ended 31st March 2022.

Raw Material consumed – 40,000 units @ ₹7 per unit.

Direct Wages:

Skilled worker – ₹9 per unit.

Unskilled worker – ₹6 per unit.

Royalty (on raw material consumed) @ ₹3 per unit.

Works overheads @ ₹8 per machine hour.

Machine Hours Worked 25,000.

Office Overheads at 1/3rd of works cost.

Sales Commission @ ₹4 per unit.

Units produced 40,000

Stock of units at the end 4,000 units, to be valued at cost of production per unit.

Sale price is ₹60 per unit.

Prepare Cost sheet showing the various elements of cost.

3. a. What are the implications of Economic Order Quantity in proper inventory management?

3. b X Ltd. estimates its carrying cost at 15% and its ordering cost at ₹9 per order. The estimated annual requirement is 48,000 units at a price of ₹4 per unit.

a) What is the most economical number of units to order?

b) How many orders should be placed in a year?

c) How often should an order be placed?


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