Page 106 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes June 8 – – – 500 1.10 550 2,000 1,950

July 20 – – – 1,000 1.25 1,250 1,000 700
2,500 2,500 1,500 1,800 1,000 700

Example: Two materials, A and B, are used as follows:
Minimum usage 50 units each per week.
Maximum usage 150 units each per week.
Normal usage 100 units each per week.
Ordering quantities : A - 600 units, and B - 100 units.

Delivery Period: A - 4 to 6 weeks, B - 2 to 4 weeks.
Calculate for each material:
(a) Minimum level,
(b) Maximum level, and
(c) Ordering level.

Solution:
Material A:
Ordering level = Maximum usage × Minimum delivery
= 150 × 6 = 900 units

Minimum level = Ordering level – (Normal usage × Normal delivery period)
= 900 – (100 × 5) = 400 units
Maximum level = (Ordering level + Ordering quantity) – (Minimum usage × Minimum
delivery period)
= (900 + 600) – (50 × 4)
= 1,500 – 200 = 1,300 units
Material B:
Ordering level = Maximum usage × Minimum delivery
= 150 × 6 = 900 units

Minimum level = Ordering level – (Normal usage × Normal delivery period)
= 900 – (100 × 3) = 300 units
Maximum level = (Ordering level + Ordering quantity) – (Minimum usage × Minimum
delivery period)
= (600 + 1,000) – (50 × 2)
= 1,600 – 100 = 1,500 units

Notes It is assumed that normal period of delivery means the average delivery period, i.e.,
5 weeks in the case of material A and 3 weeks in the case of material B.

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