Page 49 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes The unique features of the ABC analysis:

Nature A Group of Items B Group of Items C Group of Items
Level of Control Rigid control Moderate control Very little control
Order frequency Frequency of ordering- Once in 2 months Once in 6 months
weeks, fortnights
Lead time problem To be cut off drastically To be reduced moderately Lead time problem due
to clerical should be
cut off
Safety stock level Due to greater value least Due to moderate value- Due to lower value
volume of safety stock is to lesser safety stock is higher safety stock is
be maintained required required
System of Purchase Higher value demands Moderate value Lower value needs
centralized system of requires centralized and decentralized system
procurement decentralized system of of purchase
purchase
Supervision By Senior officers By Middle level managers By clerical staff

Advantages

1. It guides the management to exercise the control based on the value of goods to the total
composition.
2. Systematic inventory control can be exercised through this analysis on the basis of value of
the materials. The high value materials of Group A are rigidly controlled which fi nally led
to lesser investments.
3. Scientific system helps to lessen the storage cost of the inventory.

Self Assessment

State whether the following statements are true or false:
5. As per ABC analysis the A category of inventory includes the inventory of lesser percentage
in volume and Greater percentage in Value.
6. Cash discount is the discount granted by the supplier to the buyer of materials at the
moment of bulk purchase.
7. The bulk purchase order increases the ordering cost of the materials.
8. The greater the size of the order leads to reduce the number of the orders in procuring the
materials.

Task Pennila &Co. is a direct exporter as well as market leader in the domestic market

among acute competition. The firm is expected to have an opening stock of 2000 kg of raw
materials at the rate of ` 4 per kg. The firm should have to price the issue of materials in two

different ways, one for the domestic market and another one for the export order which
was already obtained.
Date Receipts Qty kg Rate per kg ` Issue Qty kg
Jan 6 400
Jan 10 800 4.40
Jan 15 600 4.80.
Jan 20 1000
Contd...

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