Unit 3 | Cost Accounting | 2 & 5 Marks Q&A |

 

UNIT-III

PART-A (THEORY)

1. What is maximum Stock Level?

It is that quantity above which the sock of any item should not be allowed to exceed. Fixation of quantity for maximum stock level depends on rate of consumption required for production, availability of space and cost of storage.

2. Give any two advantages of FIFO method.

FIFO method is easy to understand and operate.

FIFO method is useful where transactions are not voluminous and prices of materials are falling.

3. What is EOQ?

Economic ordering quantity is the re-order quantity, which is the quantity to be purchased cach time an order is placed. It aims at minimising both carrying cost and ordering cost. At EOQ, total cost is minimum.

4. What is material control?

Material control is a system which ensures required quantity of material of the required quality at the right time and place with minimum investment of capital. It may be defined as "the regulation of the functions of an organisation relating to the procurement, storage and usage of materials in such a way as to maintain an even flow of production without excessive investment in material stock".

5. What is reorder level?

Re-order level is a level of material at which the storekeeper should initiate the purchase requisition for fresh supplies. When the stock-in-hand comes down to the re-ordering level, it is an indication that an action should be taken for replenishment or purchase.

Re-order Level Maximum Consumption x Maximum Re-ordering Period

6. What is material turnover ratio?

The inventory turnover formula measures the rate at which inventory is used over a measurement period. One can use the formula to see if a business has an excessive inventory investment in comparison to its sales level, which can indicate either unexpectedly low sales or poor inventory planning.

When there is a low rate of inventory turnover, this implies that a business may have a flawed purchasing system that bought too many goods, or that stocks were increased in anticipation of sales that did not occur.

When there is a high rate of inventory turnover, this implies that the purchasing function is tightly managed. However, it may mean that a business does not have the cash reserves to maintain normal inventory levels, and so is turning away prospective sales.

7. Give the meaning of material control.

Materials control can be defined as a systematic control over purchasing, storing and consumption of materials. Materials control helps to maintain a regular and timely supply of materials by avoiding over and under-stocking. Materials control ensures that the right quality and quantity of materials is available to the company at the right time. Materials control helps to reduce the losses and wastage of materials by maintaining their efficient purchase, storage and use or consumption in the factory. The importance of materials control lies in its role in reducing the cost of production and increasing the profitability of the company.

8. Give any two advantages of Economic Order Quantity.

·         Finding out optimum order size (Total cost) minimum at EOQ)

·         Minimizes both ordering cost and carrying costs

9. What is Purchase Order?

A purchase order is a written authorization from a buyer to acquire goods or services. The document authorizes a supplier to deliver to the buyer at the price, quality level, delivery date, and certain other terms specified in the agreement. A purchase order is legally binding after the supplier counter-signs it.

10. What do you mean by ABC analysis?

It is 'Management by exception' system of inventory control. Always Better Control (ABC) technique of inventory control, the materials are classified and controlled according to their value. It is also called proportional parts value analysis.

11. What is standard price method?

Standard price is a pre-determined price which is fixed for a definite period, such as a year. Under standard price method, all receipts are posted in the stores ledger account at actual cost and issues are priced at standard price. The difference between standard and actual prices is transferred to Materials Price Variance Account.

12. What is minimum stock level?

Minimum level or safety stock level is the level of inventory, below which the stock of materials should not be fall. If the stock goes below minimum level, there is a possibility that the production may be interrupted due to shortage of materials. In other words, the minimum level represents the minimum quantity of the stock that should be held at all times. The minimum level is determined by using the following formula: Minimum Level = Re-order level-(Normal consumption x Normal Re-order Period)

13. What is perpetual inventory system?

A perpetual inventory system is a method of tracking and recording inventory and costs of goods sold on a continual basis, so a current inventory balance can be calculated in real time. In other words, a perpetual inventory system records all inventory transaction in real time, so the accounting system can display the current inventory balance at any point in time

14. Explain stores ledger.

Stores ledger is maintained by the costing department. It contains both quantity and value of receipts, issues and the balances. Entries are made in the stores ledger after the transactions takes place. Transactions are summarised and entries are made periodically.

15. Write short notes on standard price method.

Under standard price method, the issue price is uniform for all quantities issued. This method is relatively simple to operate as a single issue price is used during the accounting period. It eliminates clerical errors.

16. What is bin card?

The bin card provides complete information of material placed in the bin. It shows description, material code, location code, receipt of material, issues and balance of quantity. This is an important document showing the details of jobs or departments which have drawn material and reference of goods received notes against which material are received.

PART-B (THEORY)

1. Write a short note on Bin Card and Stores Ledger.

Bin card is a record of receipt and issue of materials Quantity of store received is entered with receipt column and the quantity of store issued is recorded in the issue column of Bin Card. Balance of quantity of stores is ascertained after every receipt or issue. It shows the balance of the stock at any moment of time. Bin Card is maintained by the store-keeper. He is answerable for any difference between physical store and the balance shown by the Bin Card. Thus Bin Card does not only records the receipt an issue of the stores but also assist the store keeper for control of the stock. For each item of stores minimum level maximum level, and ordering level are shown in the part of the Bin Card. By seeing the Bin Card the store keeper sends the material requisition for the purchase of materials from time to time.

A bin card is also known as bin tag or stock card and is usually hung up or placed in shelf, rack or bin where the material has been kept. Bin cards can also be in the form of loose sheets which can be maintained in a ledger kept in the stores.

The stores ledger may sometimes also contain a "min max" field, in which is recorded the minimum quantity level, below which an order must be placed for additional units. When the on-hand balance drops below the designated minimum level, the purchasing staff is notified to order more goods.

The stores ledger concept is most applicable to record keeping systems that are entirely manual. The term is rarely used when a business has converted to computerized record keeping systems.

2. Discuss the functions of store keeper.

A manufacturing company appoints a person for careful storing and safeguarding materials in a store who is called storekeeper. A storekeeper is a person who is the chief of stores and who is given the responsibility of store management. Storekeeper is responsible for safeguarding the materials and supplies in proper place until they are required for production activities. A storekeeper should be well-experienced, well-trained, honest and familiar with the tricks of store-keeping.

The main functions of storekeeper are as follows.

• ·    Maintaining proper record of materials relating to the receipt and issue of materials Checking the physical quantity of materials and verify with a bin card
• ·         Preventing unauthorized entrance into the store room
• ·         Maintaining the stock registers, entering therein all receipts, issues and balance of materials.
• ·         Checking and controlling losses due to evaporation, leakage, theft and so on.
• ·         Arranging for physical verification of store items periodically
• ·         Keeping the store always neat, clean and tidy
• ·         Supplying information of materials, stock position and so on whenever needed.

3. Explain ABC method of Inventory control.

ABC analysis is a way of categorizing the material on the basis of the quantity of consumption and their relative values. Some material might be consumed in lower quantities but their period may be very high. Such materials are kept in group "A". Similarly, some material may be consumed in large quantities but their values may be lower. Such materials are kept in group 'C'. In between these two, some materials may be consumption in moderate quantity with the moderated price. Such materials are kept in group 'B' under ABC analysis very close control is exercised over the material in group 'A' whereas a very little control is exercise is exercised over the material in group "C".