Q.1. How does a bill of material differ from material requisition note? Explain the purpose of each?

Answer :- Bill of Materials:

Bill of materials is a document that shows the type and quantity of each major item ofmaterials required to make a product.At the beginning of production process a document known as bill of materials is used for standard products. "A bill of
materials is a document that lists the type and quantity of each item of materials needed to complete a unit of standard product". In case where it is not possible to use a bill of materials, the production staff determines the materials requirements from the blueprints submitted by the customer.

Materials Requisition Form:

A detailed source document that specifies the type and quantity of materials that are to be drawn from the storeroom and identifies the job to which the costs of materials are to be charged.When an agreement is reached with the customer concerning
the quantities, price and shipment date for the order, a production order is issued. The production department then prepares amaterials requisition form. "The materials requisition form is a detailed source document that specifies the type and quantity of materials to be drawn from the storeroom, and identifies the job to which the costs of the materials are to be charged". The form is used to control the flow of materials into production and also for making entries in the accounting records. The completed form is presented to the storeroom clerk who then issues the necessary raw materials. The storeroom clerk is not allowed to release materials without such a form bearing an authorized signature. Following is an example of a materials requisition form.

Q.2. Bring out the working of perpetual inventory and periodic inventory systems in inventory management?
Answer :- Periodic inventory systems
Under the periodic system, a company takes the physical inventory periodically and uses the resulting figure to adjust the balance sheet inventory asset account. Retail shops that use periodic inventory usually take inventory at their particular year-end. However, a business could take inventory more often, such as quarterly or at the end of every heavy sales season (like Valentines Day, Mothers Day, and the December holidays). Next, the companys accounting department subtracts ending inventory totals from the beginning inventory after adding in all inventory purchases made during the period. The resulting number is costof goods sold (COGS). The balance sheet inventory account is reduced, and the income statementexpense account COGS is increased by that number to match revenue with expenses.

Perpetual inventory systems

The other inventory system used is the perpetual system. With this system, the inventory count is updated constantly, perpetually, as the electronic cash registers (ECRs) record sold items. Most largeretailers have ECRs. If youve ever used the self-checkout, youve used one. The checkout features a glass window with a red beam of light. You run the bar code of a product over the red beam, and the price (updated for sales if necessary) is automatically recorded as a sale for which youre charged and the business receives revenue. This system takes the cost of the sold item out of the asset inventory account and moves it to cost of goods sold. With point-of-sale inventory, cash register transactions update all purchase, inventory, COGS, and sales information throughout the system in real time as the transactions occur. For example, when you go into Target and buy a cookware set as you are checking out, the point-of-sale software updates the kitchen department records to show that one less cookware set is available for sale. The software also updates COGS to show the sets cost, and it updates revenue to reflect the sets retail price. Most large retail stores have point-of-sale inventory systems with item restock and reorder level alerts. The restock level alert advises purchasing employees when sales cause the number of an item in inventory to drop below the companys minimum quantity requirement. If the company also programs the reorder level (the maximum quantity of each item it wants to maintain on hand), the software can tell purchasing exactly how many of the item should be ordered.

Q.3. Differentiate between Bin cards and store ledger maintained for store records?
Answer :-

NATURE
1.User 2. Nature 3. Period 4. Posting

Bin card
Bin card is maintained by the storekeeper. Bin card is a record of quantity only. In bin card, entries are made immediately after each transaction. Postings are made before a transaction in bin card.

Store ledger
Store ledger is prepared by cost accounting department. Store ledger is a record of quantities and values. In store ledger, entries are made periodically. Posting are made after a transaction in store ledger.

Q.4. Write down the steps involved in material cost control? Answer:- We don't give much of importance to inventory lying in our stores or warehouse . Its when some consultants points
out that we have blocked moneys in these stocks that we realise that something has to be done to cut cost of inventory . following are certain steps which one should take to reduce cost on inventory.

1. Codify all items which are kept as stock in stores or warehouse .Use any inventory management software to track stocks and movement from one centre to another. 2. Classify items by ABC so you know what are high value items and keep a tab on their consumption and procurement . Next focus on low value items . 3. Examine value of items on basis of return on investment . 4.Identify high stock out items and then adjust buffer stock on cost trade off basis 5.Examine all items for safety stocks with respect of lead time , demand , stock out cost , carrying , ordering don't pile up stock intuitively 6. Do physical stock verification periodically and eliminate dead stocks ,accept obsolescence write off for these items . 7. Determine Economic Order Quantities of all items.

Q.5. State the techniques of inventory control? Answer :- Various methods for controlling inventory are described, and the advantages and disadvantages of each are discussed. The
open-to-buy (OTB) budget method limits purchases to a specific amount of funds available for purchasing pharmaceuticals during a specified period. The emphasis of the OTB method is financial control of the pharmacy inventory. Although it is useful in monitoring and adjusting the dollar value of the inventory, it should be combined with other methods for a total inventory control system. The primary emphasis of the short-list method is to provide accurate and timely inventory information to the person responsible for order placement. The short list identifies the items that are in short supply. It is the most common feedback and control mechanism in use, but it is best suited for settings where duplicate or reserve stock is maintained and monitored by more rigorous methods. The main objective of the minimum and maximum method is to determine when and how much to order of each item. It also provides limited dollar control. The major disadvantage of this method is the time it requires to establish the minimum and maximum levels and to update them regularly to reflect changes in demand. The stock record card method is used to record information on the movement of goods in and out of the storage area. Stock cards can also be used to monitor inventory levels and facilitate order initiation. It is probably the optimum method to be used alone. The most effective system of inventory control is one employing a combination of these methods tailored to meet the institution's needs and available resources.

Q.6. State the various methods of pricing the issues of materials. Describe FIFO and LIFO methods of valuation of material issues? Answer :- One of the problems that arise in costing is the pricing of the issues. This is due to the fact that generally the
goods are purchased at different lots at different points of time. When issues are made it is difficult to keep track of the issue lot and link with the purchases. Hence a method of pricing the issue has to be selected. Let us now examine different methods of pricing the issues and see one problem in this regard. A..FIFO-First in First- Out Method 1. It is based on the assumption that the materials which are purchased first are issued first. 2. Accordingly the Stock will be valued at the latest purchases. Advantages: 1. Closing stock is valued at the latest price. 2. Materials are priced at actual cost and hence no unrealized profit arises. 3. Charge to production is at the oldest price of materials. 4. Easy and Simple. Disadvantages: 1. Since the materials issued are valued at old prices the cost of production may not reflect the latest prices. 2. Comparisons become tough. 3. Complex calculation. 4. In period of rising prices the FIFO produces higher profit and increases tax liability. B.LIFO-Last in First out Method. 1. It is based on the assumption that the materials which are purchased last are issued first. 2. Accordingly the Stock will be valued at the oldest purchases unissued. Advantages: 1. Materials charged to production are at latest cost. Hence in times of rising prices the companys product quotation will be competitive. 2. This method does not result in unrealized profit or loss like FIFO 3. Simple to operate at the time of steady prices. 4. In period of rising prices the profit and tax liability under LIFO will be lower than under FIFO as the cost of production will be valued at the lower cost (old cost). Disadvantages: 1. The physical flow is different from logical flow. 2. Closing stock will not represent the current economic value and be valued at old prices. 3. Comparison of different jobs becomes difficult. 4. Complex to operate. . C .Average cost Method: It is based on the assumption that the materials kept together lose their identity and has to be valued at average price. C1. Simple Average Method.

Simple average represents the average of prices. The average prices of all the materials in stock is calculated .It does not take into account the quantities.For example if there are three different rate of products in stock say 21 , 23 , 25 then the simple average is (21+23+25)/3 =23 The simple average method operated with FIFO method. The prices of stocks issued fully as per FIFO method is not taken into account for computation. Advantages. 1. Simple Disadvantages: 1. Unscientific. 2. Results in unrealized profit and loss. D. Weighted average Method. This method takes into account the quantities. The price is calculated by dividing the total cost of material in stock calculated at actual purchase price for each lot (present in stock) by the total quantity of materials in stock. Advantages: 1. Smoothens out the effect of fluctuations and hence useful at the time of fluctuating prices. 2. The work load is reduced as it does not necessitate the calculation of issue price at the time of each issue. 3. No unrealized profit or loss arises in this method. Disadvantages : 1. Issue price may not be at the current market price. 2. When there are several lots of purchases the work load increases. 3. Excessive high or low prices are reflected in the average even after their total consumption. E.Replacement Price Method. The issues are valued at the price at which the materials would be replaced. Advantages: 1. Simple to operate 2. Production reflects the current market price. 3. When the company has bought the goods at a cheap prices earlier in a large stock and the benefit need not be passed on to the customer ,then this method will reflect profit as the production will reflect the current prices . Disadvantages: 1. The stock valuation is not at the current prices. 2. Unrealised profit or loss will arise. 3. It involves finding the replacement price at each issue and hence a little difficult to operate. F.Standard Price Method. Under this method the prices are issued at standard prices. Standard prices are fixed for a definite period. In the time of fluctuating prices the standard prices has to be fixed for short term period and changed constantly. Receipts will be at actual cost of purchase only. The difference between the standard and actual prices is transferred to Material Price variance account. Standard price is a notional price and not actual price .It is fixed taking into several factors liked Market condition, fluctuation in prices, trends, discounts etc. This method can be used in connection with standard costing system or without standard costing system.

Advantages: 1 .No cumbersome calculations at the time of each issue. 2. When standards are fixed correctly it makes the task simple. Disadvantages. 1. It results variance in profit. 2. If not fixed correctly it can affect the valuation of stock and cost of production. G.Highest in First _Out (HIFO) Method. The materials are issued at the highest price of material in stores. Once the highest price material in stock is exhausted the next highest price will be used. Advantages : 1. Production is at the high cost of production and during fluctuating prices the highest cost is recovered first . 2. Inventory value is kept low and results in secret reserve. 3. Used in cost plus contracts. Disadvantage 1. Results in secret reserve. 2. Unrealised profit or loss arises. 3. Production is not valued at current prices. H.Next in-First-out (NIFO) method. This is more similar to replacement price method except that the issues are priced at the price at which an order (purchase order) has been placed and will be received next in store. Advantages : 1. Production reflects the current market trend. Disadvantages : 1. It results in unrealized profit or loss. I .Specific price or Identifiable cost method. When materials are purchased and set aside for a specific job order then issue of that material should be at the price at which (the specific price) it has been purchased. Other issues can be at FIFO, LIFO or other methods. Advantages : 1. The job is costed at the actual material puchase cost. 2. Useful for Job costing . Disadvantages : 1. The material should be carried separately till it is issued fully.

J. Base Stock Method. This method assumes that a minimum base stock is always held in stock and is not issued. This is considered as a fixed cost and carried at original cost. The quantities in excess of base stock are valued by using FIFO or LIFO etc. Advantages 1. Simplification of valuation of inventory as the base stock values is fixed.

2. Merits of other methods (FIFO, LIFO Etc) of valuation which is used along with this will be reflected here. Disadvantages 1. It is not an independent method. 2. This is rarely used. 3. Demerits of other valuing methods that is used along with this method will be reflected here.