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Subject COST, Topic MATERIAL problem?

Vikas Kumar Gupta (Student IPCC) (408 Points)

05 December 2008

A Ltd. Is committed to supply 24,000 bearings per annum to B Ltd. on steady basis. It is estimated that it costs 10 paise as inventory holding cost per bearing per month and that the set-up cost per run of bearing manufacture is Rs. 324.

Find out the minimum inventory cost per annum?

Solution

Minimum inventory cost per annum

= Total production run cost + Totel carrying cost per annum

= 24,000 bearings/3,600 bearings x Rs. 324 + ½ x 3,600 bearings*** X 0.10 P x 12 months

= Rs. 2,160 + Rs. 2.160 = Rs.4,320

***SO, FRIENDS HEARE MY QUESTION IS , I AM NOT UNDESATANDING THAT WHY ½ x(IS MULTIPLYED BY) 3600 BEARINGS ?

Please explain me my dear friends and respected seniors why 1/2 ?

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5 Replies

Geetha (Student) (0 Points)
Replied 05 December 2008

Dear Sri.Vikasji,

The quantity order will not be held under the next consignment arrives. It will be consumed daily or so. When the next consignment arrives, this material will be reduced to zero. Right? As the consumption is on, quantity will be depleted. Carrying cost is not incurred for the entire quantity bought. So carrying cost is on the reduced quantity and becomes difficult to capture every day carrying cost. So on an average carrying cost is captured. (Opening stock+closing stock)/2 is av inventory. Day 1 when quantity is arrived- opening stock, last day, stock is reduced to zero.

(quantity ordered + Nil)/2 is average. This is what u ve Q/2

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Asif Iqbal (Chartered Accountant) (26 Points)
Replied 05 December 2008

Hi,

Friend carrying cost is for holding a unit for one year. Since we are not carrying the whole 3600 unit for one year because it will reduce day by day as we consume it, hence we takes an average of it. i.e. on an average we would be carrying 1800 units. Lets take an example you bought 3600 unit of raw material. your monthly consumption of raw material is 3600unit i.e 120 units per day. on day 1 inventory is 3600 units

on day 2 inventory is 3480

on day 3 inventory is 3360

on day 30 inventory will be nil.

Hence if we take average, it will be 1800 units per day.

In the next month we again order for 3600 unit & same process will continue.

Hence during the whole year we will be carrying 1800 unit per day on an average.

Hope my explanation will halp you.

Anu_PCC (CA STUDENT) (87 Points)
Replied 05 December 2008

From the whole lot of purchases made ...its assumed that half of the material is issued to production and half is sent to stores...hence carrying cost is incurred only on half of the goods purchased.....for this reason 1/2 is used.....

Anu

sunny (student) (20 Points)
Replied 07 December 2008

S.Srikanth (Cost Accountant ) (346 Points)
Replied 25 November 2009


"	Hi, Friend carrying cost is for holding a unit for one year. Since we are not carrying the whole 3600 unit for one year because it will reduce day by day as we consume it, hence we takes an average of it. i.e. on an average we would be carrying 1800 units. Lets take an example you bought 3600 unit of raw material. your monthly consumption of raw material is 3600unit i.e 120 units per day. on day 1 inventory is 3600 units on day 2 inventory is 3480 on day 3 inventory is 3360 on day 30 inventory will be nil. Hence if we take average, it will be 1800 units per day. In the next month we again order for 3600 unit & same process will continue. Hence during the whole year we will be carrying 1800 unit per day on an average. Hope my explanation will halp you.	"