Page 76 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes inventory) with actual stock. Perpetual inventory is essential for material control. It helps
continuous stocktaking.
Stock verification may be periodical or continuous. Annual stock taking has certain inherent
shortcomings e.g., all the items have to be covered in a given number of days, either the
production dept. has to be shut down during these days to enable thorough checking of stock, or
else the verification has to be of limited character. On the other hand, the system of continuous
stocktaking consists of counting and verifying the number of items daily throughout the year, so
that during the year all the items of stores are covered three or four time. The stock verifiers are
independent of stores and stores staff has no knowledge as to the particular items that are being
checked on a particular date.

Techniques

Material Turnover Ratio: Material turnover ratio or material turnover ratio as a technique of
material control is useful to avoid unnecessary investment on these materials whose consumption
is much less. It indicates the speed with which the raw materials have been consumed for
production. Further, it is possible to find out whether the inventory comprises of obsolete stock
of raw materials. Inventory turnover ratio can be computed with the help of following formula:
Cost of material consumed during the year
Inventory Turnover Ratio =
Average stock of materials during the year
Inventory turnover may be denoted in terms of number of days in which the average inventory
is consumed. This is obtained by using the following formula:
365 days
Inventory turnover ratio in terms of days = Inventory turnover ratio
In this case, if the period of the stock or inventory is short, material is said to be fast moving.
Illustration: From the following information, calculate the following for each material:

(i) Materials consumed,
(ii) Average inventory held, and
(iii) Inventory turnover.
Material A Material B
(`) (`)
Opening Stock 10,000 12,000

purchases during the period 52,000 46,000
Closing stock 6,000 16,000
Solution:
(i) Statement of Materials Consumed
Particulars Material A (`) Material B (`)
Opening stock 10,000 12,000
Add : purchase 52,000 46,000
Value of materials 62,000 58,000
Less : Closing stock 6,000 16,000
Materials consumed 56,000 42,000

70 LOVELY PROFESSIONAL UNIVERSITY