COST &MANAGEMENT ACCOUNTING (MGT402)
FALL 2012
ASSIGNMENT NO. 1
DUE DATE: 26TH NOVEMBER, 2012
MARKS: 20
FALL 2012
ASSIGNMENT NO. 1
DUE DATE: 26TH NOVEMBER, 2012
MARKS: 20
TOPIC TO BE TESTED:
Material controlling through Economic order Quantity – EOQ
Material controlling through Economic order Quantity – EOQ
LEARNING OBJECTIVES:
To learn about the ways to get control over material by most economical order quantity.
To learn about the total ordering cost and total carrying cost.
To learn about the decision making process for choosing suitable proposal on EOQ with the help of
total carrying cost, total ordering cost and total cost basis.
ASSIGNMENT QUESTION
PUNJNAD Textile Industries (PTI) – a privately owned textile spinning unit is engaged in yarn manufacturing
since its incorporation. The unit produces high quality yarn which is sold out immediately like a hot cake. 5
years back, Mr. Entrepreneur - the owner of PTI had signed a contract with a local cotton supplier – Mr.
Supplier for supplying fine quality cotton bails to PTI as per specified requirement for five years at a cost of
Rs. 500 per bail. PTI estimated its requirement of 12,500 cotton bails per year for smooth operations. Both the
owner and the supplier were happy for signing the contract and a feeling of earning the good amount of profit.
Mr. Entrepreneur also estimated Rs. 2,000 as cost on issuing every new order and 10% as carrying and storage
cost associated with the inventory.
Mr. Supplier successfully supplied the cotton bails to PTI for 4 years but in 5th year of the contract, due to
heavy flood, cotton crops could not be reaped at full. But, due to the signed contract with PTI, Mr. Supplier
managed to supply cotton bails to PTI as per the agreed specification and completed the contract period
successfully.
This year, due to bumper cotton crop in the region, Mr. Supplier has desired to renew the cotton supply
contract with the condition to supply 25% extra bails over the previous contract for the next 5 years. Mr.
Entrepreneur as satisfied with the cotton quality supplied earlier is considering this new option and has called
upon his manager costing – Mr. Management Accountant to compare the proposal with the contract just
ended. The manager has advised him to reject the proposal as extra quantity purchased would increase the
carrying and storage cost by 2%.
since its incorporation. The unit produces high quality yarn which is sold out immediately like a hot cake. 5
years back, Mr. Entrepreneur - the owner of PTI had signed a contract with a local cotton supplier – Mr.
Supplier for supplying fine quality cotton bails to PTI as per specified requirement for five years at a cost of
Rs. 500 per bail. PTI estimated its requirement of 12,500 cotton bails per year for smooth operations. Both the
owner and the supplier were happy for signing the contract and a feeling of earning the good amount of profit.
Mr. Entrepreneur also estimated Rs. 2,000 as cost on issuing every new order and 10% as carrying and storage
cost associated with the inventory.
Mr. Supplier successfully supplied the cotton bails to PTI for 4 years but in 5th year of the contract, due to
heavy flood, cotton crops could not be reaped at full. But, due to the signed contract with PTI, Mr. Supplier
managed to supply cotton bails to PTI as per the agreed specification and completed the contract period
successfully.
This year, due to bumper cotton crop in the region, Mr. Supplier has desired to renew the cotton supply
contract with the condition to supply 25% extra bails over the previous contract for the next 5 years. Mr.
Entrepreneur as satisfied with the cotton quality supplied earlier is considering this new option and has called
upon his manager costing – Mr. Management Accountant to compare the proposal with the contract just
ended. The manager has advised him to reject the proposal as extra quantity purchased would increase the
carrying and storage cost by 2%.
REQUIREMENT:
Being a student of cost & management accounting you are asked to calculate the following:
1. The most economical order quantity in case of both the proposals (current as well as previous)
2. The total ordering cost which has to be borne by PTI on both the proposals (current as well as
previous)
previous)
3. The total Carrying cost which has to be borne by PTI on both the proposals (current as well as
previous)
previous)
4. Using the order quantities, total ordering cost and total carrying cost calculated above; calculate the
total cost for both proposals. Also suggests the most suitable proposal for PTI on total cost basis.
total cost for both proposals. Also suggests the most suitable proposal for PTI on total cost basis.
IMPORTANT:
24 hours extra / grace period after the due date is usually available to overcome uploading difficulties. This
extra time should only be used to meet the emergencies and above mentioned due dates should always be
treated as final to avoid any inconvenience.
extra time should only be used to meet the emergencies and above mentioned due dates should always be
treated as final to avoid any inconvenience.
OTHER IMPORTANT INSTRUCTIONS:
DEADLINE:
Make sure to upload the solution file before the due date on VULMS.
Any submission made via email after the due date will not be accepted.
FORMATTING GUIDELINES:
FORMATTING GUIDELINES:
Use the font style “Times New Roman” or “Arial” and font size “12”.
It is advised to compose your document in MS-Word format.
You may also compose your assignment in Open Office format.
Use black and blue font colors only.
RULES FOR MARKING
Please note that your assignment will not be graded or graded as Zero (0), if:
It is submitted after the due date.
The file you uploaded does not open or is corrupt.
It is in any format other than MS-Word or Open Office; e.g. Excel, PowerPoint, PDF etc.
It is cheated or copied from other students, internet, books, journals etc.
QtyRequired
UnitsNo of
OrdersPer Order
Cost Total Ordering
Cost Average Ordering
Qty Carring Cost Per Unit Total Carring
CostTotal Cost2000125006.252000 12,500 1,000 50 50,000 62,5001800125006.942000 13,889 900 50 45,000 58,8891500125008.332000 16,667 750 50 37,500 54,16712001250010.422000 20,833 600 50 30,000 50,83310001250012.502000 25,000 500 50 25,000 50,000 EOQ 7001250017.862000 35,714 350 50 17,500 53,2145001250025.002000 50,000 250 50 12,500 62,5003001250041.672000 83,333 150 50 7,500 90,833 Proposal ContractOrder
QtyRequired
UnitsNo of
OrdersPer Order
Cost Total Ordering
Cost Average Ordering
Qty Carring Cost Per Unit Total Carring
CostTotal Cost1300125009.622000 19,231 650 60 39,000 58,2311270125009.842000 19,685 635 60 38,100 57,78512501250010.002000 20,000 625 60 37,500 57,5009131250013.692000 27,382 457 60 27,390 54,772 EOQ 8751250014.292000 28,571 438 60 26,250 54,8216251250020.002000 40,000 313 60 18,750 58,7505001250025.002000 50,000 250 60 15,000 65,000
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Per Unit Cost |
Annual
Required Units
|
Ordering
Cost for One Order
|
Carrying
Costs
|
|
Previous
Contract
|
500
|
12,500
|
2000
|
10%
|
Proposed
Contract
|
500
|
15,625
|
2000
|
12%
|
Moving on ,
EOQ = [(2xRUxOC)/(UCxCC%)]^1/2
Total Ordering Cost=
Required Units/Order Quantity = Number of Orders
= Number of Orders x Cost per Order
Total Carrying Cost
= Ordering Quantity/2 = Average Ordering Quantity
=Carry Cost per Unit = Unit
Cost x CC%
= Average
Ordering Quantity x Carrying Cost Per Unit
Total Cost = Total
Ordering Cost x Total Carrying Cost
Per Unit Cost =
Total Cost/Order Quantity
Order Quantity
|
Total Ordering Cost
|
Total Carry Cost
|
Total Cost
|
Per Unit Cost
|
|
Previous Contract
|
1000
|
25000
|
25000
|
50000
|
50
|
Proposed Contract
|
1020.6
|
31250
|
30618
|
61868
|
60.62
|
----------------------------------------------------------------------------------
The economic order quantity (Previous Proposal)
EOQ=1000
The economic order quantity (Current Proposal)
EOQ=1000
Total ordering cost (Previous Proposal)
25000
Total ordering cost (Current Proposal)
39062.5
Total carrying cost (Previous Proposal)
312500
Total carrying cost (Current Proposal)
610351.5625
Total cost (Previous Proposal)
337500
Total cost (Current Proposal)
649414.0625
Previous proposal is suitable proposal for PTI
-----------------------------------------------------------------------------------
total OC ACTUAL = 3125
Total OC PROPOSED = 3906.25
Total CC Actual = 50000
Total CC Proposed = 5000
Total Cost Present = 53125
Total Cost Proposed = 53906.25
If we want to counter check this with manager statement for increase of 2 % , here the difference between two Total Cost is exactly 2%.
Total OC PROPOSED = 3906.25
Total CC Actual = 50000
Total CC Proposed = 5000
Total Cost Present = 53125
Total Cost Proposed = 53906.25
If we want to counter check this with manager statement for increase of 2 % , here the difference between two Total Cost is exactly 2%.
-------------------------------------------------------------------------------
Annual consumption=12500
Cost to place one order=2000
Cost per unit=500
carrying cost=10%
And in case of 25% increase
Annual consumption=15625 after 25% increase
Cost to place one order=2500 after 25% increase
Cost per one cottom bail=625 after 25% increase
Carrying cost=12.5% after 25% increase
Cost to place one order=2000
Cost per unit=500
carrying cost=10%
And in case of 25% increase
Annual consumption=15625 after 25% increase
Cost to place one order=2500 after 25% increase
Cost per one cottom bail=625 after 25% increase
Carrying cost=12.5% after 25% increase
-----------------------------------------------------------------------------
|
Name: IIU
|
|
ID apna apna
|
|
Subject Cost and
Management Accounting(MGT402)
|
|
Assignment
# 01
|
Answer:
Economic Order
Quantity in Previous Proposal:
Required Quantity= Rq=
12,500
Ordering Cost = Co= 2,000
Inventory Unit cost =Uc= 500
per bail
Carrying & Storage Cost 10% Uc=Cc= 50
As Economic Ordering
Quantity;
EOQ = (2(Rq*Co/Uc*Cc) ^ (1/2)
= (2(12,500*2,000)/ (500*s50)
^ (1/2)
= (2000) ^ (1/2)
EOQ = 145
units
The most economical order
quantity in case of previous proposals is 45 units.
Economic Order Quantity in Current Proposal:
New Required quantity=
Rnq= 15,625 (N-1)
Carrying & Storage Cost
2% Uc=Cc= 10
Economic Order Quantity;
EOQ = (2(Rq*Co/Uc*Cc) ^ (1/2)
= (2(15625*2,000)/ (500*10)
^ (1/2)
= (12,500)
^ (1/2)
= 112 units
The most economical order quantity in case of current proposal is 112
units.
Answer # 2
The total ordering
cost which has to be borne by PTI on both the proposals:
Ordering Cost in
Previous Proposal:
Ordering Cost = Number of
orders x Cost per order
= 86(N-2)*2,000
= 172,414 ……………………….. A
Ordering Cost in Current Proposal:
Ordering Cost = Number of orders
x Cost per order
= 140(N-3)
* 2,000
= 279,018 …………………….. B
Total Ordering Cost =
A+ B
=
451,432
Answer # 03
The total Carrying cost which has
to be borne by PTI on both the proposals:
Carry cost on the Previous Proposal;
Average
ordering quantity x carrying cost per unit
= 6,250*25,000
Total carrying cost = Rs.
156,250,000 ……………. A
Carry cost on the Current
Proposal;
Average
ordering quantity x carrying cost per unit
= 7813*5,000
Total carrying cost = Rs.
39,062,500 ………………. B
Total Carrying cost on both the Proposal = A+B
= 195,312,500
Answer #4
Total cost for the
Previous Proposal:
= order quantities (total
ordering cost + total carrying cost)
= 145 (172,414+
156,250,000)
= Rs. 22,681,250,000
Total cost for the Current
Proposal:
= 112* (279018+ 39,062,500)
= Rs. 4,406,250,000
The total cost for the
Current Proposal is less than Previous Proposal So , the Current Proposal
for the PTI is most suitable on the cost basis.
Working:
N-1.
Previous required
quantity = Rq= 12,500
25 %Increased due to new
contract = 3,125
15,625
N-2.
No of Orders = Required Units/Orders
Quantity
= 12,500/145
= 86
N-3.
No of Orders = Required Units/Orders
Quantity
= 15625/112
= 140
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