MATERIAL FORMULAS

MATERIAL

1) Reorder level = Maximum usage * Maximum lead time

                             (Or) Minimum level + (Average usage * Average Lead time)

2) Minimum level = Reorder level – (Average usage * Average lead time)

3) Maximum level = Reorder level + Reorder quantity – (Minimum usage * Minimum lead time)

4) Average level = Minimum level +Maximum level              (or)

                                                      2

                                Minimum level + ½ Reorder quantity

 5) Danger level (or)   safety stock level

                             =Minimum usage * Minimum lead time (preferred)

           (or)               Average usage * Average lead time

           (or)               Average usage * Lead time for emergency purposes

6) EOQ (Economic Order Quantity - Wilson’s Formula) = √2AO/C

         Where A = Annual usage units

                    O = Ordering cost per unit

                    C = Annual carrying cost of one unit

                   i.e. Carrying cast % * Carrying cost of unit

7) Associated cost = Buying cost pa + Carrying cost pa

8) Under EOQ Buying cost = Carrying cost

9) Carrying Cost = Average inventory * Carrying cost per unit pa * Carrying cost %

               (Or)          Average Inventory * Carrying cost per order pa

10) Average inventory = EOQ/2

11) Buying cost = Number of Orders * ordering cost

12) Number of Orders = Annual Demand / EOQ

13) Inventory Turnover (T.O) Ratio = Material consumed

                                                     Average Inventory

14) Inventory T.O Period =                         365                   .

                                                     Inventory Turnover Ratio              

15) Safety stock = Annual Demand *(Maximum lead time - Average lead time)

                                      365                

16) Total Inventory cost = Ordering cost + Carrying cost of inventory +Purchase cost

17) Input Output Ratio = Quantity of input of material to production

                                          Standard material content of actual output

Remarks:

1) High Inventory T.O Ratio indicates that the material in the question is fast moving

2) Low Inventory T.O Ratio indicates over investment and locking up of working

     Capital in inventories

Pricing of material Issues:

1) Cost price method:-

    a) Specific price method      

    b) First in First out method (FIFO)

    c) Last in First out method (LIFO)

    d) Base stock method

2) Average price method:-

    a) Simple average price method =    Total unit price   

                                                      Total No. of purchases

   

    b) Weighted average price method =       Total cost

                                                            Total No. of units

   

    c) Periodic simple average price method = Total unit price of certain period

                                                           Total Number of purchases of that period

·         This rate is used for all issues for that period.

·         Period means a month (or) week (or) year)                              

    d) Periodic weighted average price method = Total cost of certain period                                          

                                                                         Total Number of units of that period

    e) Moving simple average price method

                     = Total of periodic simple average of certain number of periods

                                                        Number of periods

    f) Moving weighted average price method

             = Total of periodic weighted average of certain number of periods

                                               Number of periods

3) Market price method:

a)   Replacement price method = Issues are valued as if it was purchased now at current market price

b)   Realizable price method = Issues are valued at price if it is sold now

4) Notional price method:

a)   Standard price method = Materials are priced at pre determined rate (or) Standard rate

b)   Inflated price method = The issue price is inflated to cover the losses incurred due to natural(or)climatic losses

5) Re-use price method = When materials are returned (or) rejected it is valued at different price. There is no final procedure for this method.

ABC Analysis (or) Pareto Analysis:  In this materials are categorized into

          Particulars                                     Quantity                 Value

“A” – Important material                           10%                         70%

“B” – Neither important nor unimportant   20%                         20%

“C” – UN Important                                    70%                        10%

Note:

1) Material received as replacement from supplier is treated as fresh supply

2) If any material is returned from Department after issue, it has to be first disposed in the next issue of material

3) Loss in the book balance of stock and actual is to be transferred to Inventory adjustment a/c and from there if the loss is normal it is transferred to Over Head control a/c. If it is abnormal it is transferred to costing profit and loss a/c.

         

 4) CIF = Cost Insurance and Freight (This consignment is inclusive of prepaid insurance and freight)

5) FOB = Free on Board (Materials moving by sea – insurance premium is not paid)

6) FOR = Free on Rail (Insurance and freight is not borne by the supplier but paid

                                                      by the company or purchase)

7) For each receipt of goods = Goods Receipt note

8) For each issue of goods = Materials Requisition note (or) Material Issue note

Accounting Treatment:

1) Normal Wastage = It should be distributed over goods output increasing per unit cost

2) Abnormal Wastage= It will be charged to costing profit and loss a/c

3) Sale value of scrap is credited to costing profit and loss a/c as an abnormal gain.                                                     

4) Sale proceeds of the scrap can be deducted from material cost or factory overheads.

5) Sale proceeds of scrap may be credited to particular job.

6) Normal Defectives = cost of rectification of defectives should be charged to specific

7) Abnormal Defectives = This should be charged to costing profit and loss a/c

8) Cost of Normal spoilage is to borne by good units

9) Abnormal spoilage should be charged to costing profit and loss a/c