Tax Shield Education Centre.

Cost Accounting - 1

TRANSPORTATION
Transportation deals with transfer of goods from producer to seller. The objective is to
minimized total cost, total transport cost & time, at the same time total demand must be
fulfilled and total supply must be used.

The rules are :-

1. Prepare a balance problem .(note 1)
2. prepare and initial allotment .(note2)
3. check the feasibility.(note 3)
4. optimality test

Note-1: Problems are of 2 types :

1. Balanced problem i.e. demand = supply

2. Unbalanced problem, i.e. demand # supply. If it is an unbalanced problem,

say demand > supply a dummy supply row is to be introduced with a
production capacity equal to the difference of demand & supply and having
no transportation cost in any of the cell of that column. If supply > demand ,
introduce a dummy column etc. etc.

Note-2: Prepare an initial solution by any of the following three methods ( prefer VAM)

A. North-West Corner Rule :

Allocate maximum possible quantity ( minimum of demand or supply or MPQ ) to

North-West corner among the empty cell. Select next N-W among empty cell &
repeat the process till all quantities are allotted.

B. Least Cost Method :

Allocate maximum possible quantity to the lowest cost empty cell .Incase of tie for
lowest cost , select that cell where maximum quantity can be allotted .If there is a
tie , select any one empty cell . Re-calculate the demand & supply quantity of the
corresponding row & column. If demand or supply is fulfilled then put dash in the
other empty cells of that row or column. Repeat the process till all quantities are
alloted.

C. Vogel’s Approximation Method ( VAM ) :

1. Calculate penalty for each row and column separately, where penalty = 2nd
lowest cost - lowest cost, among the empty cell
In case same lowest cost in two empty cells , penalty = 0.

2. Select highest penalty row or column

Allocate maximum possible quantity to the lowest cost empty cell in that row
or column.
Re-calculate the supply & demand of the corresponding row & column.
Compute the penalty for each row and column.
Select the highest penalty etc.,etc.

3. In case of tie in penalty, select lowest cost empty cell ,

If there is a tie also, select that empty cell where highest qty. can be allotted.
If that is a tie, apply rule of thumb.
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Note-3 : Check the feasibility of the above solution : no. of occupied cells ≥ m + n - 1,
where m = no. of rows, n = no. of columns

If it is not feasible , allocate a very small qty. ∈ to the lowest cost among
unoccupied cell.

In case of tie in lowest cost unoccupied cell ,check the cost evaluation or loop of
the corresponding tie cell. put ∈ in such a way so that negative cost evaluation
can be avoided.

Note-4: Test for optimal solution by either of the following methods :

A. Stepping Stone Method

Rule:

(1) Calculate cost of transferring one unit to each unoccupied cell ( known as cost
evaluation ) with the help of the loops through the occupied cell .

(2) If all the cost evaluations are +ve or zero, then optimal solution is reached,
although the zero cost evaluation cells signifies to alternative solution ( only in
the final table. )

(3) If the cost evaluations are -ve then select highest -ve cost.

Prepare the loop for that un-occupied cell.

Find is the lowest qty. among the “-” marked cell.

Add this min. quantity to the “+” marked cell and subtract the same from the “-”
marked cell.

In case of tie in “- ” cost evaluation , select that unoccupied cell where maximum
qty. can be transferred.

If that is a tie also apply rule of thumb.

(4) Prepare a new table and evaluate the cost of the unoccupied cells again.

B. Modified Distribution Method. (MODI) or Algebra method

Prepare the cost equation for the occupied cells & then find the cost evaluation of
the unoccupied cells. Transfer maximum possible units to the highest negative
cost evaluation cell, etc. etc.

Note –5: In case of profit maximisation problem

Calculate profit for each cell where Profit = ( S. P. - Production cost - transport
cost) on per unit basis. Subtract the profit of each occupied cell from the
highest profit p.u. ,

The result is the cost matrix.

Now solve the problem by the previous transportation rule.

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PROBLEMS

1. An oil corporation has got three refineries P, Q, and R and it has to send petrol to four different
depots A, B, C and D. The cost of shipping 1 gallon of petrol from each refinery to each depot is
given below. The requirements of the depots and the available petrol at the refineries are also
given. Find the minimum cost of shipping:

Refinery Depot Available

A B C D
P 10 12 15 8 130
Q 14 11 9 10 150
R 20 5 7 18 170
Required 90 100 140 120

2. A company manufacturers a product in three of its factories situated at stations A, B, and C

The production is transferred to meet the demand in five warehouses. The supply and demand
as well as the cost of transportation from the factories to ware house in rupees per unit of product
are given in the table below :

Warehouse
Factories 1 2 3 4 5 Supply
A 40 36 26 38 30 160

B 38 28 34 34 198 280

C 36 38 24 28 30 240

Demand 160 160 200 120 240

You are required to prepare a schedule for transportation of the production form the factories
to warehouses and determine the total minimum transportation cost. 12-02-6A

3. Consider a transportation problem with m = 3 and n = 4, where :

c11 = 2 c12 = 3 c13 = 11 c14 = 7
c21 = 1, c22 = 0, c23 = 6 c24 = 1
c31 = 5 c32 = 8 c33 = 15, c34 = 9

Suppose S1 =30 , S2 = 30 and S3 = 20 whereas D1 = 25, D2 = 20, D3 = 15, and D4 = 20 . Apply the
transportation simplex method to find an optimal solution.

3. Priyanshu enterprise has three factories at locations A, B and C which supplies three
warehouses located at D. E and F. Monthly factory capacities are 10, 80 and 15 units
respectively. Monthly warehouse requirements are 75, 20 and 50 units respectively. Unit
shipping costs (in Rs.) are given below :

Factory Warehouse
D E F
A 5 1 7
B 6 4 6
C 3 2 5

The penalty costs for not satisfying demand at the warehouse D, E and F are Rs. 5, Rs. 3 and
Rs. 2 per unit respectively. Determine the optimal distribution for Priyanshu, using any of the
known algorithms.
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4. A company has three factories (F) from which it transports the product to four warehouses (W)
The unit cost of production at the three factories are Rs. 4, 3, 5 respectively. Given the following
information on unit costs of transportation, capacities at the three factories and o the requirement
at the four warehouses, find the optimum allocation.

Unit cost of Transportation cost, Rs./unit.

Factory production --------------------------------------------------------------- Capacity
Rs./unit W1 W2 W3 W4
F1 4 5 7 3 8 300
F2 3 4 6 9 5 500
F3 5 2 6 4 5 200
Requirements 200 300 450 100

5. The Bombay Transport Company has trucks available at four different sites in the following
number :
State A --5 trucks, Site B -- 10 trucks, Site C -- 7 trucks, Site D - 3 trucks
Customers W, X and Y require trucks as shown :
Customer W - 5 trucks, customer X -- 8 trucks, Customer Y -- 10 trucks

Variable costs getting trucks to the customers are :

From A to W -- Rs. 7, to X -- Rs. 3, to Y -- Rs. 6
From B to W -- Rs. 4, to X -- Rs. 6, to Y -- Rs. 8
From C to W -- Rs. 5, to X -- Rs. 8, to Y -- Rs. 4
From D to W -- Rs. 8, to X -- Rs. 4, to Y -- Rs. 3
Solve the above transportation problem.

Investment maximising decision

6. A company has four factories F1, F2, F3 and F4 manufacturing the same, product. Production
and raw material costs differ from factory to factory and are given in the following table in the first
two rows. The transportation costs from the factories to sales depots, S1, S2, S3, are also given.
The last two columns in the table give the sales price and the total requirement at each depot.
The production capacity of each factory is given in the last row.

F1 F2 F3 F4
Sales price
Production cost/unit 15 18 14 13 per unit Requirement
Raw material cost/unit 10 9 12 9

Transportation Cost per unit

S1 3 9 5 4 34 80
S2 1 7 4 5 32 120
S3 5 8 3 6 31 150
capacity 10 150 50 100

Determine the most profitable production and distribution schedule and the corresponding profit.
The surplus production should be taken to yield zero profit.

Find the amount of profit if 10 units are to be allotted to S1F1 cell?

7. A company wishes to determine an investment strategy for each of the next four years . Five
investment types have been selected, investment capital has been allocated for each of the
coming four years, and maximum investment levels have been established for each investment
type. An assumption is that amounts invested in any year will remain invested until the end of the
planning horizon of four years.
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The following table summaries the data for this problem. The values in the body of the table
represent net return on investment one rupee up to the end of the planning horizon. For example,
a Rupee invested in investment type B at the beginning of year 1 will grow to Rs. 1.90 by the end
of the fourth year, yielding a net return of Rs. 0.90.

------------------------------------------------------------------------------------------------------------------------------
Investment made Investment Type Rupees
at the beginning A B C D E available
of year (in 000’s)
NET RETURN DATA
1 0.80 0.90 0.60 0.75 1.00 500
2 0.55 0.65 0.40 0.60 0.50 600
3 0.30 0.25 0.30 0.50 0.20 750
4 0.15 0.12 0.25 0.35 0.10 800

Maximum Rupee
Investment (in 000’s) 750 600 500 800 1,000

The objective in this problem is to determine the amount to be invested at the beginning of each
year in an investment type so as to maximise the net rupee return for the four year period. Also
calculate the NPV at 10% cost of cap.

Solve the above transportation problem and get an optimal solution. Also calculate the net return
on investment for the planning horizon of four year period.

Decision making with transportation

8. The Agri-Products Company has two factories, at Tiruchi and Meerut. There are four major
warehouses to which the finished products are sent : at Guwahati, Nagpur, Ahmedabad and
Chandigarh. The Company plans to locate an additional factory at either Indore or at Kanpur. If
the following matrix gives the details of the shipping costs, manufacturing capacities and
warehouse requirements, how would you go about choosing between the two proposed
locations, i.e. Indore and Kanpur. Suggest an approach.

Shipping Costs Rs. per Unit

Place Guwahati Nagpur Ahmedabad Chandigarh Capacity
Tiruchi 25 9 10 20 220
Meerut 10 8 6 5 380
Indore 15 2 4 10 200
Kanpur 9 7 7 5 200
Units Required 100 150 300 250

Transportation with overtime & storing cost

9. Consider the problem of scheduling the weekly production of certain items for the next 4 weeks.
The production cost of the item is Rs. 10 for the first two weeks and Rs. 15 for the last 2 weeks.
The weekly demands are 300, 700, 900 and 800, which must be met.

The plant can produce a maximum of 700 units per week. In addition, the company can employ
overtime during the second and third week. This increases the weekly production by an
additional 200 units, but the production cost increases by Rs. 5 Excess production can be stored
at a unit cost of Rs. 3 per week.

How should the production be scheduled so as to minimise the total cost ?

Tax Shield Education Centre. Cost Accounting - 6

Transportation with distance

10. Two chemical plants located at A and B have stocks of 2000 and 1900 tonnes of a chemical . At
D and E there are demands of 1500 and 1700 tonnes respectively. The distances between the
points are shown in the figure. Assume transport cost per tonne to be proportional to the
distance.
Is it optimal (in minimizing total transport cost) in send 1500 tones from A to D, 500 tonnes from
A to E and 1200 tonnes from B to E ?
A
600 KM
300 KM

E D

750 KM 320 KM
B
Transshipment Problem

11. A firm having two sources S1 and S2 wishes to ship its products to two destinations D1 and D2.
The number of units available at S1 and S2 are 5 and 25 respectively and the product demanded
at D1 and D2 are 20 and 10 units respectively. The firm, instead of shipping directly from sources
to destinations decides to investigate the possibility of trans-shipment. The unit transportation
costs (in rupees) are given in the following table. Find the optimal shipping schedule :
Source Destination Available
S1 S2 D1 D2
S1 0 2 : 3 4 5
Source S2 2 0 : 2 4 25

D1 3 2 : 0 1 --
Destination D2 4 4 : 1 0 --

Demand -- -- 20 10