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TOPIC 2: Material Costing Formula (2 or 3 Questions are Expected)

(1). Re-order Level (ROL)= Minimum Level + Consumption during the time required to get the fresh delivery
Formula given by Wheldon = Maximum consumption x Maximum Reorder period
Here Reorder period = Time taken to get the material once it is initiated

(2). Minimum (or Safety) Stock Level = ROL – (Normal Consumption x Normal Reorder period)
Here Normal Consumption, if not specifically mentioned in question, is average of minimum consumption and maximum consumption.

(3). Maximum Stock Level = ROL + Re-order Quantity(ROQ) – (Minimum consumption x Minimum Re-order period)
Here, ROQ is Economic order quantity.

(4). Danger Level = Average Consumption x Maximum Re-order period for emergency purchase

(5). Average Stock Level
If Re-order quantity is given
= Minimum Stock level + ½ of Re-order quantity
If Re-order quantity is not given
= (Minimum Stock Level + Maximum Stock Level) / 2

(6). Economic Order Quantity (EOQ)

Here,   Q = Annual Demad
O = Cost of placing an order
C = Annual Carrying cost per unit

Assumptions of EOQ:
a)      Dynamic conditions of the supply which enabled firm to place as many orders as it needs.
b)      Stability of Prices
c)       Total quantity to be consumed is certain

(7). Input – Output Ratio = (Units of Input / Units of Output)

(8). Material Turnover Ratio = (Cost of Material Consumed / Average Stock)
Here, Cost of Material Consumed = Opening stock of Raw material + purchase of Raw material – Closing stock
And , Average stock  = (Opening stock of Raw Material + Closing stock of Raw Material) / 2

(9). Material Turnover Ratio (Days/Months) = (Days in a year or Months)/ Material Turnover Ratio

(10). Meaning of Lead Time = Time Gap Between ordering of Material and replenishment of stock by suppliers

Pricing of Material Issue: Methods
Cost Price Methods
a.      Fifo (First in First Out): Material Purchased first are issued first to production.
b.      Lifo(Last in First Out): Price of latest available consignment is takenfor pricing.
c.       Average cost Method:
Simple Average: Total of the prices of the materials in the stock divided by the number of the prices used in that total.
Weighted average Price: Price which is calculated by dividing the total cost of materials by the total quantity of materials in hand.
d.      Inflated Price: Price higher than the actual cost of material to recover the cost of wastage of materials from the production.
e.       Specifit Price: Materials are issued to production at their actual cost assuming that material in the store are capable of being identified as belonging to specific lot.
f.        Base stock: Under this method safety stock is maintained out of first purchase.
g.      HIFO (Highest in first out): Materials are issued at highest price.

Market Price Methods:
a.       Replacement Price: This price is used in case of the items held in stock for use in production .
b.      Realisable Price: This price is used in case of the items held in stock for sale.

Standard price methods:
Under this prices are predetermined and both receipts and issues are valued at predetermined price.
a.       Basic standard price: Ideal standard price fix for long term.
b.      Curren standard price: Standard price subject to change on account of prevailing trends in the market.