Cost & Management Accounting - MGT402 Power Point Slides Lecture 09

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    Material

    Lectur-9

    Main Ahmed Farhan (ACA)

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    Inventory Control System

    1. Order level.

    2. Maximum stock level.3. Minimum stock level.

    4. Danger level.

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    Inventory Control System

    Ordering point or Re-order level

    Maximum consumption x Lead time

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    Inventory Control System

    Maximum stock level

    Ordering level-(Minimum consumption*Lead time) +E.O.Q

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    Inventory Control System

    Minimum stock level

    Order level-(Average consumption*Lead time)

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    ExampleMaximum consumption 1000 units per day.

    Minimum consumption 800 units per day.

    Average consumption 900 units per day.Lead time 5 to 10 days

    Average lead time 8 days

    Emergency lead time 2 days

    Economic order quantity 2500 units

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    Order Level

    Maximum consumption x Lead time

    1000 units x 10 days

    = 10,000 units

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    Maximum Stock Level

    Ordering level-(Minimum consumption*Lead time) +E.O.Q

    10,000-(800 * 5)+25000

    = 31000 units

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    Minimum Stock Level

    Ordering point (Average daily consumption*Lead time)

    10,000 (900 * 8)

    = 2800 units

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    Danger Level

    Average daily consumption x Emergency time

    900 x 2

    = 1800 units

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    Economic Order Quantity (E.O.Q)

    Economic Order Quantity is the quantity which an

    entitle orders to the suppliers. This order Quantityshould be Economical.

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    Methods for EOQ calculation

    Economic Order Quantity

    Formula

    Table Graph

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    E.O.Q

    2x RU x O.C

    U.C x C.C%

    RU Annual Required units

    O.C Ordering Cost (Cost Per Order)U.C Per Unit CostC.C Carrying Cost

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    Example

    Annual required units 80,000 unitsOrder cost Rs. 1200

    Per Unit cost Rs. 6

    Carrying cost 50% U.C

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    Solution

    2 x 80,000 x 1200

    6 x 50%EOQ =

    = 8000 Units

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    EOQ

    2 x 80,000 x 12003

    8000 =

    2x RU x O.CU.C x C.C%

    EOQ

    2 x 80,000 x 12003

    8000 =

    22

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    EOQ

    80,000 x 12003/2

    8000 * 8000 =

    80,000 x 12008000

    8000 * 3/2 =

    12,000 = 12,000

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    No Of Orders

    No of orders

    RU

    Ordering quantity=

    100 / 50 = 2 units

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    Average Inventory

    Average Inventory

    Ordering Quantity

    2

    8000 units

    2= 4000 units

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    Table Method

    Order Qty RU # oforders

    O.C

    # oforders *

    1200

    C.C

    Orderqty/2 * 3

    Total cost

    20,000 80,000 4 4,800 30,000 34,800

    10,000 8 9,600 15,000 24,600

    8,000 10 12,000 12,000 24,000

    5,000 16 19,200 7,500 26,700

    4,000 20 24,000 6,000 30,000

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    Diagram (E.O.Q.)

    ORDER SIZE (Q) (000)

    Carrying Cost

    Ordering Cost

    Total Cost

    COSTS

    (000)

    54 10 208

    6

    12

    18

    24

    30

    36

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    Inventory Cost

    Defective units

    Spoiled units

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    Losses

    Normal Loss : The Loss which was expected

    Abnormal Loss : The Loss which was not expected

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    Charge Of Loss

    Normal Loss FOH cost

    Abnormal Loss Job

    Charge

    Charge