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Management Accounting F2

Material cost Class practice question 1 Which of the following is not a stockholding cost: A B C D

The opportunity cost of capital tied up The cost of insurance Shipping and handling costs Stock obsolescence

2 The objective of holding buffer inventory is to take advantage of quantity discounts. Is this statement TRUE or FALSE? A True B False 3 A company wishes to minimize its inventory costs. Order costs are $10 per order and holding cost is $0.10 per unit. Fall Co estimates annual demand to be 5,400 units. The economic order quantity is_______ units. 4 The demand for a product is 12,500 units for a three month period. Each unit of product has a purchase price of $15 and ordering costs are $20 per order placed. The annual holding cost of one unit of product is 10% of its purchase price. What is the Economic Order Quantity (to the nearest unit)? A 577 B 816 C 866 D 1,155 5 A manufacturer uses 100,000 components costing $1each at a constant rate throughout the year. The cost of making a single order for more components is $10 and the holding costs for each component are 0.5% of the average inventory value. What is the EOQ? A 1,411 B 14,142 C 20,000

Prepared by: Muzzammil Malik

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Management Accounting F2

6 Moura uses the economic order quantity formula (EOQ) to establish its optimal reorder quantity for its single raw material. The following data relates to the stock costs Purchase price: Carriage costs: Ordering costs:

£15 per item £50 per order £5 per order

Storage costs: 10% of purchase price plus £0·20 per unit per annum Annual demand is 4,000 units. What is the EOQ to the nearest whole unit? Units__________ 7 A company determines its order quantity for a raw material by using the Economic Order Quantity (EOQ) model. What would be the effects on the EOQ and the total annual holding cost of a decrease in the cost of ordering a batch of raw material?

A B C D

EOQ

Total annual holding cost

Higher Higher Lower Lower

Lower Higher Higher Lower

8 A company determines its order quantity for a component using the Economic Order Quantity (EOQ) model. What would be the effects on the EOQ and the total annual ordering cost of an increase in the annual cost of holding one unit of the component in stock? EOQ ________

Total annual ordering cost _________

9 A company uses 1,000 units of a component per month. The cost of placing an order is £160. EOQ is 980 units. Calculate holding cost/unit. 10 The purchase price of a stock item is £25 per unit. In each three month period the usage of the item is 20,000 units. The annual holding costs associated with one unit equate to 6% of its purchase price. The EOQ 730 What is the cost/order? $_______

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Management Accounting F2 11 A retailer has a steady demand for rugby balls at 50 a month. Each ball costs $6 from the supplier. The costs involved in placing an order are $10 and the stockholding costs are 20% of the stockholding value per annum. How many orders will be placed per annum? A 1.73 B 6 C 8.48 D 100 12 Point Ltd uses the economic order quantity (EOQ) model to establish the reorder quantity for raw material Y. The company holds no buffer stock. Information relating to raw material Y is as follows: Annual usage 48,000 units Purchase price £80 per unit Ordering costs £120 per order Annual holding costs 10% of the purchase price. Calculate: (a) The EOQ. (b) The total annual cost of purchasing, ordering and holding stocks of raw material Y. 13 A company uses the Economic Order Quantity (EOQ) model to establish reorder quantities. The following information relates to the forthcoming period: Order cost = £25 per order Holding costs = 10% of purchase price = £4/unit Annual demand = 20,000 units No safety stocks are held. What are the total annual costs of stock (i.e. the total purchase cost plus total order cost plus total holding cost)? $_______ 14 A business currently orders 1,000 units of product X at a time. It has decided that it may be better to use the Economic Order Quantity method to establish an optimal reorder quantity. Information regarding stocks is given below: Purchase price £15/unit Fixed cost per order £200 Holding cost 8% of the purchase price per annum Annual demand 12,000 units Current annual total stock costs are £183,000, being the total of the purchasing, ordering and holding costs of product X. Required: (a) Calculate the Economic Order Quantity. (b) Using your answer to (a) above calculate the revised annual total stock costs for product X. (c) Calculate saving / additional cost if EOQ used .

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Management Accounting F2 15 Point Ltd uses the economic order quantity (EOQ) model to establish the reorder quantity for raw material Y. The company holds no buffer stock. Information relating to raw material Y is as follows: Annual usage 72,000 units Purchase price ÂŁ40 per unit Ordering costs ÂŁ100 per order Annual holding costs 10% of the purchase price. Calculate: (a) The EOQ. (b) The total annual cost of purchasing, ordering and holding stocks of raw material Y. The supplier has offered Point Ltd a discount of 1% on the purchase price if each order placed is for 2,500 units. (c) Calculate the total annual saving to Point Ltd of accepting this offer. 16 What is the economic batch quantity used to establish? A B C D

reorder quantity recorder level cumulative production quantity inventory level for production

17 Motto Ltd manufacturers component RT in batches. Motto can produce 100,000 units in a year but the sales demand of the component is 25,000 units. The cost of setting a batch production run is $50 and the holding cost /unit is $2.5/year What is EBQ of this component (in units?) 18 SPA Ltd calculated that economic batch quantity is 2,000 units. SPA capable to produce 100,000 units/year but the demand of the product is 20,000 units. Holding cost /unit is $2 Calculate cost /setup. 19 Data relating to a particular stores item are as follows: Average daily usage 400 units Maximum daily usage 520 units Minimum daily usage 180 units Lead time for replenishment of stock 10 to 15 days Reorder quantity 8,000 units What is the reorder level (in units) which avoids stock outs? Units_________

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Management Accounting F2 20 Data relating to one particular stores item are as follows: Average daily issues 70 units Maximum daily issues 90 units Minimum daily issues 50 units Lead time for the replenishment of stock 11 to 17 days Reorder quantity 2,000 units Reorder level 1,800 units What is the maximum stock level (in units) for this stores item? ________ units

The following information relates to questions 21 and 22 A domestic appliance retailer with multiple outlets sells a popular toaster known as the Autocrisp 2000, for which the following information is available: Average sales 75 per day Maximum sales 95 per day Minimum sales 50 per day Lead time 12-18 days Reorder quantity 1,750

21 Based on the data above, at what level of inventory would a replenishment order be issued? _______units 22 Based on the data above, what is the maximum inventory level? _______units 23 Data relating to a particular stores item are as follows: Average daily usage 400 units Maximum daily usage 520 units Minimum daily usage 180 units Lead time for replenishment of inventory 10 to 15 days Average lead time 13 days Reorder quantity 8,000 units What is the reorder minimum inventory level? ________units

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Management Accounting F2 24 A manufacturing company uses 25,000 components at an even rate during a year. Each order placed with the supplier of the components is for 2,000 components, which is the economic order quantity. The company holds a buffer inventory of 500 components. The annual cost of holding one component in inventory is $2. What is the total annual cost of holding inventory of the component? A B C D

$2,000 $2,500 $3,000 $4,000

25 Which of the following is correct with regard to inventories? (i) Stock-outs arise when too little inventory is held (ii) Safety inventories are the level of units maintained in case there is unexpected demand (iii) A re-order level can be established by looking at the maximum usage and the maximum lead-time A (i) and (ii) only B (i) and (iii) only C (ii) and (iii) only D (i), (ii) and (iii) 26 There are 27,500 units of Part Number X35 on order with the suppliers and 16,250 units outstanding on existing customers' orders. If the free inventory is 13,000 units, what is the physical inventory? A B C D

1,750 3,250 24,250 29,250

27 The following represent the materials transactions for a company for a year: $'000 Materials purchases 240 Issued to production 215 Materials written off 12 Returned to stores 6 Returned to suppliers 2 The material stock at 31 December 20X1 was $42,000. What was the opening balance on the materials inventory account at 1 January 20X1? $_________

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material cost